




















,0 q 






INSURANCE 
Science and Economics 



A PRACTICAL DISCUSSION 

OF PRESENT-DAY PROBLEMS OF 

ADMINISTRATION, METHODS 

AND RESULTS 

For Insurance Officials, Managers, Agents, Merchants 

Lawyers, Teachers, Students, and Others 

Interested in The Broader Aspects of 

Insurance as a Business in Its 

Relation to Public Welfare 

and the State 



BY 

Frederick L. Hoffman 

Insurance Statistician; President American Statistical Asso- 
ciation; Fellow Royal Statistical Society; Member 
American Economic Association, etc. 



Price, $3.00 



/ 



% 



1911 



THE SPECTATOR COMPANY 



Chicago Office: 

1 59 La Salle Street 



135 William Street 
NEW YORK 



Copyright 1911 

BY THE SPECTATOR COMPANY 

New York 



©GI.A286993 






To 

the Memory of 

my 

Father 

Augustus Franciscus 

Hoffmann 



TABLE OF CONTENTS. 

Page 

Introduction v 

Chapter I. 
Life Insurance as a Science, , , , 5 

Chapter II. 
Insurance Economics, , 50 

Chapter III. 
Insurance as an Element of Early Commerce 91 

Chapter IV. 

The Origin and Growth of Law and Legislation on Insur- 
ance 140 

Chapter V. 

Life : Insurance Supervision and Government Control in 

Germany 228 

Chapter VI. 
The Taxation of Life Insurance Interests 268 

Chapter VII. 
The Tax Burden on Life Insurance Policyholders 283 

Chapter VIII. 
The English Assurance Companies' Act of 1909 326 

Chapter IX. 
The Law of Average 333 



PREFACE. 

The modern literature of insurance in all its branches, 
while quite extensive and practically valuable, is largely re- 
stricted to the consideration of matters relating to the office and 
field administration of insurance companies. Insurance, as a 
branch of contract law, has a literature of its own, which, 
however, is quite limited in its utility to the student of insurance 
questions and problems of the present day. As yet, only a few 
really useful works have been written in English on the larger 
and broader aspects of insurance in its relation to public policy 
and the functions of government arising out of the corporate 
nature of insurance institutions. Obviously, the conduct of the 
business cannot be called entirely successful unless insurance 
interests are intelligently co-ordinated to an enlightened public 
opinion demanding economical administration on the one hand, 
and absolute certainty of the fulfillment of contractual obligations 
on the other. Insurance today is an indispensable element of social 
and commercial life, and it is no longer exclusively a matter 
of local or state concern. The marvellous growth of the business 
within recent years emphasizes its national, and even interna- 
tional, importance and the duty of government to conserve the 
public interests represented by it to the fullest possible extent. 
The questions and problems discussed in the present volume are, 
therefore, not only of today, but of the future, and a matter of 
serious concern to all who hold responsible positions with insur- 
ance companies, or who, in some capacity or another, are re- 
quired to express their judgment upon public questions involv- 
ing insurance considerations. The problem of a more perfect 
development of the abstract theory and of a better practical 
adjustment of insurance to the varying needs of a progressive 
society, are inherent in the nature of the business, but their 



PREFACE 

successful solution lies largely with men of trained minds and 
impartial judgment, deservedly entitled to the full confidence 
of all concerned. The present work is, therefore, intended for 
the better and more adequate study of insurance as a branch 
of economics, while the large number of references appended 
to the several chapters will facilitate research work, where 
limitations of space have made a more extended treatment 
impossible. The bibliography includes most of the princi- 
pal works on insurance, from the earliest times to the 
present day, useful for both theoretical and practical purposes, 
with a due regard to the historical development of the business 
and the complex problems arising out of its gradual evolution 
from the most primitive form of individual underwriting to a 
corporate business of colossal national and international mag- 
nitude. 

For a full quarter of a century I have been actively en- 
gaged in the business of insurance, in the office administration, 
as well as in the field. My own extensive experience has forced 
upon me the conviction that one of the most serious shortcom- 
ings of insurance at large is the lack of proper insurance 
education on the part of many of the men who discharge re- 
sponsible functions, as managers, agents, or other field and 
office employees. There are few textbooks of real value 
accessible to students in English, although many such are con- 
veniently available to students of insurance familiar with Ger- 
man or French. The tendency on the part of the International 
Actuarial Congress, to become more and more a gathering of 
men interested in insurance science, after the manner of the 
German national society by that name, is a further indication 
that the modern trend of the business gives promise of better 
results in the years to come. The action of numerous insti- 
tutions of learning which have introduced insurance courses, 
foreshadows a more deliberate and practical method of in- 
surance education than has heretofore been possible, or 
thought necessary. It is, therefore, to be hoped that the present 
volume will be an aid in this direction and that the work will 



PREFACE 

prove useful to administrative officers, teachers, managers, 
agents, and others in sympathy with the larger aims and ideals 
of a business which is second to none in the civilized world. 

Frederick L. Hoffman. 

6 i Washington St., East Orange. N. J. 
March 20, 191 1. 



INTRODUCTION. 

Insurance as a science is properly considered a branch of 
economics, and as such it was included in the most recent 
authoritative classification of the sciences, adopted by the 
Congress of Arts and Sciences, held under the auspices of the 
Louisiana Purchase Exposition in 1904. At this congress two 
papers were read on insurance, the first on " Insurance as a 
Science," by myself, and the second, on " Insurance in Its 
General Aspects," by Prof. B. H. Meyer, now a member of 
the Interstate Commerce Commission.* Previous classifications 
of science had not included insurance, although as early as 
1865 Dr. Engel, the director of the Prussian Statistical Bureau, 
had most ably presented the claims of insurance to scientific 
recognition before the International » Statistical Congress held 
that year in Berlin. The claim of insurance to the dignity of 
a science, however, is not new, for certainly as early as 1747 
a small tract was published in England, by Mr. Corbyn Morris, 
entitled, "An Essay towards illustrating the Science of Insur- 
ance. Wherein it is attempted to fix, by precise calculation, 
several important maxims upon this subject; to solve various 
problems, and cases of contest; and particularly to balance, 
whether it be nationally advantageous to insure the ships of 
our foreign enemies." John Weskett, merchant, who in 1781 
published an elaborate and classical digest " Of the Theory, 
Laws and Practice of Insurance," particularly emphasized its 
scientific aspects and observed that, " There is scarcely any 
other occupation, or profession, though far more unimportant, 
and less abstruse or complicate than that of insurance, amongst 

* " Proceedings of the Congress of Arts and Science," St. Louis, Mo., 
1904, in 8 vols. Published by Houghton, Mifflin & Co., Boston, 1906, 
Vol. VII, p. 207, et. seq 



INTRODUCTION 

the whole circle of arts and commerce exercised in this king- 
dom, where some method of instruction is not looked upon as 
requisite; and, where the persons employed in it are not pretty- 
well versed in the grounds and theory, and the greater part 
of them expert in the practice of the principles on which it 
ought to be prosecuted: — but, one may venture to assert that, 
in no other class is there to be perceived so great a proportion 
of a numerous body of practitioners, who are so incompetently 
skilled in the nature of the matters about which they are 
occupied, and of the laws and rules, by which they ought to 
be governed, as amongst those who are in the actual employ- 
ment of, and whose avocations and concerns are immediately 
connected with, affairs of insurance." What was true of this 
early period, when insurance was in its infancy, is equally true 
at the present time, that insurance education is generally 
neglected and upon even important matters of theory and 
practice there still exists much confusion and doubt, which 
only thoughtful consideration and painstaking analysis can 
set aside. The field of research is immense. The history of 
the business is largely unwritten and the works of classical 
writers are difficult of access to the student of insurance who 
desires to sustain his reasonings and conclusions by the same 
substantial foundation of knowledge as is required in every 
other branch of science. 

Insurance as a branch of economics has also been much 
neglected by writers on political and social economy, but during 
very recent years there has been an awakening of interest in 
the economic theory of risk and insurance, which seems to 
indicate a more extended and qualified consideration of the 
subject in the future. It is still an open question as to which 
of the three general divisions of political economy — that is, 
production, distribution and consumption — should comprehend 
insurance, or whether the factor of risk assumption and dis- 
tribution, through insurance, is not inherent in them all. The 
practical importance of such consideration is particularly 
apparent in the far-reaching issues involved in the question 

vi 



INTRODUCTION 

whether insurance is commerce within the meaning of the 
commerce clause of the Constitution, although a number of 
decisions of the Supreme Court have heretofore been to the 
contrary. If economic theory sustains the conclusion that 
insurance is an element in the cost of production, and perhaps 
as much so in distribution, it is difficult to escape the conviction 
that insurance transactions fall properly within the scope of 
commercial undertakings, intercourse or trade, by whatsoever 
means or methods the same may be carried on. It requires no 
very extended research into the standard works on insurance 
theory, practice and law on the one hand, and commercial 
theory, practice and law on the other, to sustain the view that 
from the very earliest time insurance transactions have been 
considered, and invariably so, as being commercial transactions 
within the same meaning and scope as bills of lading, bills of 
exchange, and other negotiable instruments of various kinds. 
In the brief discussion of insurance as an element of early 
commerce only a few of the foremost authorities have been 
drawn upon, to avoid needless elaboration and wearisome 
repetition of detail. A discussion of insurance as an element 
of modern commerce would easily make a volume by itself, 
with a due regard to the numerous branches of insurance which 
have been developed within recent years. Their mere enumera- 
tion is sufficient to emphasize the practical commercial aspects 
of insurance as a necessary factor in mercantile adventure, 
commercial credit, and national advance. By way of illustra- 
tion, reference may be made to through bills of lading, which 
include the assumption of risk on the part of the carrier 
in transportation by land, while long usage has required 
the assumption of the risk in navigation by the shipper and 
the general custom of covering such shipments by marine 
insurance.* Every through bill of lading, therefore, contains 

* It is stated in the Compendium of the Official, Southern and Western 
Freight Classifications, published by the U. S. Dep't of Agriculture in 
1910, that " The cost of insurance against marine risk will not be assumed 
by carriers unless specifically provided for in tariffs." 



INTRODUCTION 

a special reference to the limited liability of carriers in this 
respect, while every invoice of a through shipment from inland 
points to places abroad includes a certificate of insurance for 
the full and necessary protection of the cargo against loss. 

Reference may also be made to an important aspect of 
insurance in its relation to American shipping, for there is 
apparently much justification in the assertion of those who 
hold that the decline in the American merchant marine was in 
part the result of unfair classification by Lloyds of our ships 
during a critical period in the evolution of shipping, and 
furthermore that the American market for marine insurance 
is entirely insufficient for American needs.* 

For the study and qualified consideration of questions and 
problems of this kind there is need of the accessibility of the 
classical writings on insurance, which are now extremely rare. 
Few even of those who have given much time and thought to 
the practical development of the business of insurance are 
aware of the wealth of literary material available for a history 
of insurance and a critical outline of the development of insur- 
ance theory and practice from the earliest times. Every stu- 
dent of law and legislation is familiar with the ancient maritime 
codes or sea-laws, of which the earliest is the Rhodian Sea-law, 
which during the last few years has been made accessible through 
the elaborate translation from original manuscripts by Mr. 
Walter Ashburner. All that there is contained in this fragment 
of law, which dates back to about 900 B. C, has its practical 
bearing upon modern methods of insurance, for the ancient 
doctrines of contributionship and average, jettison and salvage, 
maritime loans and other matters, are still held and applied in 
the courts of law of every civilized nation, including our own. 

What Mr. Ashburner points out in his discussion of the 
Rhodian Sea-law is, unfortunately, true also of modern times, 

* Hearings before the Senate Commission on Merchant Marine, Vol. 
I, p. 192 et. seq. Senate Report No. 2755, 58th Congress, 3d Session, 
Washington, D. C, 1905. See also the Report of the U. S. Commissioner 
of Navigation for 1890, p. 97 et. seq. 



INTRODUCTION 

in that the ruthless destruction of commercial documents has 
deprived the students of law and legislation of much valuable 
material which is now irrevocably lost. A thorough study of 
insurance is out of the question until the works of the classical 
writers, the elaborate treatises by Magens, Molloy, Postlethwayt, 
Beeves, Weskett, Caines and many others are made accessible, 
and until even the still earlier treatises on insurance in Latin are 
made available in English as a necessary basis for a sound 
understanding of the ancient origins out of which the modern 
structure of insurance has developed. Early laws and ordi- 
nances dating back to the 13th and 14th centuries, are full 
of meaning even at the present day. Study of their provisions 
proves conclusively that from the very beginning of insurance 
as a business the insurance contract has been a matter of 
government supervision and control. Historical evidence is 
not wanting to prove that as early as 122 7-1 234 bottomry 
loans were prohibited by papal decree on the ground of their 
being contrary to public policy,* while as early as 1568 insur- 
ance was prohibited by the Duke of Alba as Regent of the 
Netherlands, f and contracts or agreements in various forms, 
wagering or gambling policies, etc., have been prohibited from 
time to time by different governments practically throughout 
the entire modern history of the business. 

Insurance law as it is laid down in the commentaries of 
Blackstone and Kent, is not only an indispensable requirement 
in a full course of legal study, but it is equally valuable and 
necessary to the student of insurance in general. Kent, in his 
remarks upon the insurance contract and its gradual develop- 
ment through the course of centuries, observed, with reference 
to the value of insurance as an element of commerce: 

"■ The business of uncovered navigation or trade would be 
spiritless and presumptuous. The contract of insurance pro- 
tects, enlarges, and stimulates maritime commerce; and under 
its patronage, and with the stable security which it affords, 

* Plass, " Geschichte der Assecuranz," Hamburg, 1902, p. 19. 
t Plass, ibid, p. 32. 



INTRODUCTION 

commerce is conducted with immense means and unparalleled 
enterprise, over every sea, and to the shores of every country, 
civilized and barbarous. Insurers are societies of capitalists, 
who are called by their business to study with profound sagacity, 
and with exactness of calculation, the geography and naviga- 
tion of the globe, the laws of the elements, the ordinances of 
trade, the principles of international law, and the customs, 
products, character, and institutions oi every country where 
tide waters roll, or to which winds can waft the flag of their 
nation." 

A business of the magnitude of modern insurance is en- 
titled to a literature of its own, a series of thoroughly digested 
text-books, a well established code of fundamental principles 
of law and legislation, and a national institute for promoting 
knowledge and developing the arts or methods by which sound 
theory can best be carried into practical effect. The time is slowly 
passing when the acquisition of new insurance through effec- 
tive solicitation will constitute the chief consideration of success. 
Evidently it requires no argument however, to sustain the 
position of those who, during the formation period of the 
business, against almost insuperable odds, have adhered to the 
idea of aggressive solicitation even at considerable expense 
to advance the cause of insurance among every element of 
the population, from the poor and ignorant to the well to do 
and well informed. The insurance idea is subtle and difficult 
of clear comprehension except in actual commerce, where 
the necessity of insurance protection is so obvious and self- 
evident that it requires no argument or endorsement, as is 
made clear by the rapid growth of marine, fire, and other 
forms of property insurance, which are now quite generally 
made use of without the aid of much active personal solicita- 
tion. In life, accident, and many other forms of insurance, 
the difficulties in this respect are more serious, and the pro- 
gress of insurance education is necessarily a slower one. 

In the course of time, however, the insurance idea is 
becoming more familiar to the masses, and the sense of insur- 
ance obligations as a matter of personal or property protection 



INTRODUCTION 

tends to become subconscious, and indifference and opposition 
must gradually disappear. With increasing education and the 
spread of general knowledge on the one hand, and the impera- 
tive need of economic security against the casualties or calami- 
ties of life, on the other, the social necessity of insurance will 
become more obvious and the future growth of the business will 
be more and more the resultant of its own momentum. In other 
words, insurance, from being purely a form of business enter- 
prise or associated effort for mutual protection, tends slowly but 
surely to become a social and economic institution, the evidence 
of which is met with to an increasing extent in so-called gov- 
ernment insurance, or compulsory insurance, or quasi forms of in- 
surance, state security and guaranty, which imperceptibly shade 
off into the theory and practice of true insurance. The most 
interesting proof of this assertion is to be found in the elaborate 
consideration on the part of an English parliamentary commit- 
tee of a national guaranty for the war risks of shipping, which 
arose out of the previous considerations of a Royal Commission 
on the supply of food and raw material in time of war. It is a 
serious but common error to seek for insurance knowledge only 
among the readily accessible sources of information. It is, for 
illustration, only known to the very few, that the very stamp 
act which led to the American revolution included stamp duties 
upon policies of insurance. It is also not generally known, if 
at all, that a corresponding act, imposing stamp duties upon 
policies of insurance, was passed by the U. S. Congress as early 
as 1797. The Annals of Congress, and even the Abridged 
Debates, by Benton, from 1789 to 1856, contain numerous and 
important discussions of insurance matters which are not even 
mentioned in the few historical works on insurance in the 
United States. In the Journals of the Continental Congress 
are contained a number of articles suggestive of proposals 
for annuity schemes as revenue measures to provide funds 
for carrying on the war of the Revolution, while the early 
messages of the governors of the different states contain 
important references to insurance of great historical and more 



INTRODUCTION 

or less practical value today. The proceedings of commer- 
cial associations often contain important deliberations upon 
particular phases of insurance, and the subject, among others, 
was brought before the Industrial Commission and the Senate 
Commission on the Merchant Marine. An able discussion of 
marine insurance in its practical relations to freight charges 
and the whole problem of transportation by water is contained 
in the report on that subject by the Commissioner of Corpora- 
tions, while numerous cases on admiralty law, particularly the 
case of Insurance Co. vs. Dunham, abound with suggestive 
judicial opinion which have a direct bearing upon the further 
development of sound insurance theory and the perfection of 
the policy contract of insurance in all its branches.* 

The most urgent requirement today is for carefully prepared 
text -books on insurance, and the correction or re-statement of 
discussions of insurance practice in text -books on arithmetic, 
and higher mathematics. The subject of insurance in its 
entirety requires to be taught in our leading universities, not 
primarily for the purpose of training men to become insur- 
ance managers, actuaries, or specialists in particular depart- 
ments, but as a branch of science in the same sense and as 
physics, geology, chemistry, mechanics, banking, transportation, 
etc., are taught. The higher form of teaching is, however, 
out of the question until proper text-books are provided, 
in which the principles and elements of insurance shall be 
authentically set forth so that they may safely be used as 
evidence in legal controversies and settlements of differences of 



* Among modern works which take cognizance of insurance as an ele- 
ment of commerce are, "Lessons in Commerce" by Gambroro and Gault, 
5th Ed., London, 1904, and 'An Essay on the Early History of the Law 
Merchant," by W. Mitchell, Cambridge University Press, 1904. Among 
earlier works which should be consulted are, "Proceedings of the Com- 
mercial Convention held in Detroit, July, 1865," and "The National and 
Private Alabama Claims and their Final and Amicable Settlement", by 
Chas. C. Beaman, 187 1; also, "The Report of the Commissioner of Cor- 
porations on Cotton Exchanges," Washington, 1908, and " Sea Law and 
Sea Power," by T. Gibson Bowles, London, 19 10. 

xii 



INTRODUCTION 

opinion concerning the proper meaning of particular terms. 
The general teaching of insurance as an element of commercial 
law as well as of contract law generally, requires also to be 
much improved, and the movement for uniformity in insurance 
legislation requires to be more actively fostered than has here- 
tofore been the case. The pressing need of federal supervision 
of insurance ; of expert codification, and of equitable insurance 
taxation, are entitled to the most serious consideration, not 
only on the part of those engaged in the business of insurance, 
but of lawyers, merchants, bankers, economists, and others 
whose judgment and experience would aid in the solution of 
pending questions which at present are largely a matter of 
chance opinion and of drifting public policy. 

Never before was there a time when insurance in its vari- 
ous aspects received as much public consideration as today. 
Questions and problems of old-age pensions, contributory 
schemes or retirement funds, workmen's compensation and 
employers' liability, government insurance, unemployment in- 
surance, agricultural insurance, and industrial accident insur- 
ance, aside from the question of safe and economical adminis- 
tration of state chartered corporations, are now subjects of 
general discussion, committee hearings, legislative debates, and 
state action, with the practical certainty that more or less 
serious errors of material consequence will result from imper- 
fectly considered plans or ill-considered schemes. The necessary 
aid must come from those who have seriously deliberated upon 
these questions and who bring a ripe knowledge and large 
experience to bear upon conclusions and recommendations as 
to what is and what is not compatible with the highest grounds 
of public policy. In this sense I would interpret the modern 
conception of insurance education as a branch of science and 
economics, as an important department of the common and 
statutory law, and finally as a proper subject for historical 
inquiry and qualified technical research. 



CHAPTER I 
LIFE INSURANCE AS A SCIENCE. 

The first inclusion of insurance in an authoritative classi- 
fication of the sciences occurred in 1904, when the Interna- 
tional Congress of Arts and Science, which met that year under 
the auspices of the Louisiana Purchase Exposition, assigned 
to life insurance its proper place as a branch of economics, 
which, broadly defined, is "the science of the relation between 
private property and public wealth." The honor of having 
been the first to assign a definite place to insurance in the 
science of economics appears to belong to Mr. Henry Dunning 
Macleod, whose conception of economics comprehends, first, 
material things; second, personal qualities, both in the form 
of labor and credit; and third, annuities. Most of the works 
on political economy and social science are barren of references 
to the third department, which, for want of a better term, 
Macleod defines as annuities, or "the right to receive a series 
of future payments." Such rights he terms "negative economic 
quantities," comprehending all mercantile and banking credits, 
checks, bills of exchange, terminable annuities, leaseholds, poli- 
cies of insurance of different kinds, and many other valuable 
rights, amounting in value to thousands of millions of dollars, 
of which there is scarcely any! notice in the text- books on 
economics. He very properly remarks that by introducing 
this class of incorporeal property, he has doubled the field of 
economics. 

To establish the relation of the science of insurance to 
the other great divisions of accurate and systematized human 
knowledge is the purpose of this discussion, and the more defi- 
nitely this relation is established, the more clearly we shall 



LIFE INSURANCE AS A SCIENCE 

comprehend the true nature, possibilities, and results of insur- 
ance as a vast and indispensable social institution of today. 

Insurance, reduced to its simplest terms, means the appli- 
cation of the principle of association to the equalization of 
losses resulting from the inherent uncertainty in human affairs. 
This is the risk of untimely death, of fire, shipwreck, burglary, 
windstorms, floods, and many other contingencies outside of the 
control of man. The uncertainty of human life is modified by 
social progress, in particular by the advances in medicine and 
related sciences, but there must always remain the risk of pre- 
mature death, which insurance alone can equalize through the 
principle of association. In the classic language of the first 
Select Committee on Friendly Societies, in 1825, it seems 
that "wherever there is a contingency, the cheapest way of 
providing against it is by uniting with others; so that each 
man may subject himself to a small deprivation in order that 
no man may be subjected to a great loss. He upon whom 
the contingency falls does not get his money back again, nor 
does he get for it any visible or tangible benefit, but he obtains 
security against ruin, and consequent peace of mind." 

Theory op Risk and Insurance. 
The theory of risk and insurance has been elaborated and 
set forth by Mr. Allan H. Willett in a most instructive disser- 
tation published by Columbia University in 1901. He holds, 
and very properly so, that as a general rule uncertainty exer- 
cises a repellent influence in human life and that the existence 
of risk in an approximate static state causes an economic loss, 
while, on the other hand, the assumption of risk is a source of 
gain to society. From this point of view the business of insur- 
ance does not differ essentially from general commercial enter- 
prises. Risk is assumed in mining and agriculture in much the 
same manner as risk is assumed in the business of insurance, 
but in life insurance, for illustration, the assumption of a risk and 
the equivalent premium payments required are determined by 
the theory of probability and the established laws of human 

6 



LIFE INSURANCE AS A SCIENCE 

mortality and observed experience. In general commercial 
enterprise the risk assumed is, as a rule created, while in insur- 
ance the risk assumed is pre-existing. This marks the broad 
division between gambling, speculation and insurance. Insur- 
ance is not "in the nature of a bet," for in insurance an effort 
is made to eliminate an existing risk by its assumption on the 
part of the many, while in gambling a non-existing risk is cre- 
ated with resulting uncertainty and needless loss to society. 

The gain resulting to society is the reduction of the uncer- 
tainty for the group as a whole, or the substitution of certain 
loss for uncertain loss. By this process of diminishing the 
degree of uncertainty, the cost of the risk to society is very 
largely and considerably reduced, if not entirely eliminated, and 
thus it follows, in the words of Willett, that "the risk an insur- 
ance company carries is far less than the sum of the risks of the 
insured, and that as the size of the company increases, the dis- 
proportion becomes greater" ; or, to use the definition of Roscher: 
" The aggregate danger is less than the sum of the individual 
dangers, for the risk of it is more certain, and uncertainty itself 
is an element of danger." It is of the utmost importance that 
this point should be thoroughly realized by the statesman and 
the general public, so that from individual appreciation of insur- 
ance as a beneficent social institution may evolve the national 
appreciation of insurance as an institution making for the 
security of society and the well-being and effective protection 
of its members against the uncertainties of human life. 

Applied Ethics. 
At the outset we must consider the relation of insurance 
to ethics, for unless the business of insurance has the sanction 
of private and public morality it would be to no purpose to 
discuss its social and economic importance. One of the earliest 
objections to life insurance arose from the view that it was a form 
of gambling and that to insure one's life was not quite in har- 
mony with religious duty. Even to-day a religious sect called the 
Dunkards object to life insurance on the ground that it has not 

7 



LIFE INSURANCE AS A SCIENCE 

biblical sanction, or at least, is not specifically enjoined as a 
duty by biblical authority. Few things, however, it would seem, 
are more readily susceptible of proof than that insurance must 
of necessity be included in the moral forces which make for 
the betterment of mankind, and especially for the gradual 
amelioration of the condition of the poor. Life insurance in 
particular appeals to man's moral sentiments, making for the 
protection and support of others at the cost of self-sacrifice and 
self-denial. So well has this been realized that almost from its 
earliest history we hear of the duty of insurance, until to-day 
this sentiment has become subconscious and a part of the 
conscience of civilized man, practically the same under con- 
ditions of poverty as under conditions of material well-being. 

Much injury has been done to the cause of insurance by 
the unfortunate and unwarranted assumption that there is a 
fundamental identity between insurance and gambling. There 
is this much truth in the assumption, that the fundamental 
laws of chance and probability have at times and with great 
skill been applied to efforts at systematic gambling, but speaking 
generally, without much success. Gambling, lotteries, and 
kindred attempts to gain by the losses of others are intrinsically 
immoral in their results, while life insurance is intrinsically 
moral as a method and means for the advancement of mankind. 
Insurance advances progress, while gambling retards it. This 
fact is well brought out by Dymond in his Essays on Morality, 
and is indorsed by Wayland in his Elements of Moral Science. 
Dymond remarks, with particular reference to the duty of in- 
surance against fire, that "the merchant who conducts his 
business partly or wholly with borrowed capital is not honest 
if he endangers the loss of an amount of property which, if lost, 
would disable him from paying his debts." To guard against 
this possible loss he holds that it would be unjust under such 
circumstances not to insure, for the majority of uninsured 
traders, if their houses and goods were burned, would be unable 
to pay their creditors. The injustice, in his opinion, consists 
in the taking of needless or unnecessary risk. Had life insurance 



LIFE INSURANCE AS A SCIENCE 

in 1836, when this was written, been developed to the present 
extent of a universal provident institution, the Quaker moralist 
would, without question, have enjoined with even greater 
emphasis the duty of insurance protection for widows and 
orphans and self-protection against want in old age. 

Insurance Mathematics. 
The second great division of modern science is mathe- 
matics, itself the foundation stone of insurance theory and 
development. Without mathematics life insurance could not 
be thought of as a science, nor could its progress long con- 
tinue without the application of mathematical checks to 
intricate processes, the real nature of which can only be 
explained by mathematical researches. It has, in fact, been 
common usage for many years to speak of the work of the 
actuary as actuarial science, and the training of the actuary 
and the required quality of his judgment is very largely 
mathematical. It is a primary necessity if he is to possess the 
ability to master the more subtle problems of insurance theory. 
It is, however, with much justice that Young and other writers 
hold that "every problem in life insurance administration — the 
scope of investments, the ratio of expenditure, and the amount 
of new business which will probably produce a favorable or 
disadvantageous effect upon profits — possesses an actuarial 
aspect of definite significance, and demands the application 
of professional knowledge and experience." But primarily the 
work of the actuary is concerned with the mathematical and 
fundamental nature of life insurance as determined by the 
laws of human mortality and expectancy, upon which the vast 
business rests with absolute certainty for the ultimate fulfill- 
ment of contract obligations. Some of the greatest names in 
mathematical science and astronomy are those of men who have 
rendered signal service to the cause of insurance. From Fermat 
and Pascal, Newton and Leibnitz, Bernoulli and DeMoivre, 
Laplace and Quetelet, we have a long list of mathematical 
philosophers extending to the present time, whose work has 



LIFE INSURANCE AS A SCIENCE 

made possible the development of the science of life contingencies. 
It is upon the science of mathematics that the science of 
insurance rests, and it is the actuary who applies abstract 
mathematical principles to the solution of practical prob- 
lems of business administration- Hence the actuary must 
be more than a mathematician, and the tendency of the 
age is constantly to enlarge the function of this office 
by delegating the purely mathematical side of the work 
to qualified mathematicians. Much remains to be done in the 
field of insurance mathematics to develop the science and art 
of life contingencies to its highest possible degree of perfection. 
Great indeed as is the work of Woolhouse, Gompertz, Makeham 
and Young, each period presents problems of its own which de- 
mand the specialization of expert talent, never needed to such 
an increasing extent as in the administration of a great and 
successful life insurance company of to-day. 

Biological Science. 
Biological science, or the science of living things, rests, 
in a larger measure than is commonly assumed, upon a statistical 
foundation. Much, if not most, of what life insurance companies 
require to know of biology for the medical selection of risks 
relates to normal and abnormal man from the viewpoint of 
anatomy and physiology. American anthropometry, while well 
advanced since the army statistics by Gould were published in 
1869, as a memoir of the Sanitary Commission, leaves much to 
be attained before we shall be in a position to deal in a strictly 
scientific manner with the problems of normal stature, weight, 
chest expansion, pulse-rate, and other elements too numerous 
to be here referred to. The tables published by the Association 
of Medical Directors and re-arranged by Dr. O. H. Rogers, are 
an admirable indication of the treasures which the archives of 
life insurance companies yield when subjected to expert tabu- 
lation and critical analysis. For the needs of accurate chest 
diagnosis we require more determining data than are at present 
available while the field of human thermometry as applied to 



LIFE INSURANCE AS A SCIENCE 

life insurance selection has remained almost neglected since 
Seguin published his work in 1876. 

The larger and more involved problems of human multipli- 
cation and normal increase, the marriage rate, fecundity and 
sterility, consanguinity, race-mixture and intermarriage are all 
pending questions, toward the solution of which insurance 
contributes much information and expert talent. All that is 
summed up in the problems of heredity, both direct from 
parent to offspring and through collateral branches of the family, 
is of the utmost importance to life insurance companies, and in 
time the vast number of accurate family records in the possession 
of these companies as a part of the application for insurance, 
supplemented by the known results of subsequent mortality, 
with certified causes of death, must needs add much of value 
and interest to the future development and practical value of 
biological science. Toward the problem of reproductive selec- 
tion, so admirably set forth by Karl Pearson, life insurance can 
contribute much valuable information, particularly on the point 
of the effect of the age of the parents at the time of the appli- 
cant's birth on the subsequent chances of his death. 

Insurance Medicine. 
If the mathematical basis of life insurance is derived from 
the doctrine of probabilities, the medical basis is derived from 
pathology, or the doctrine of diseases, their causes, mode of 
occurrence, etc. The position of the medical director is of equal 
fundamental importance in the administration of a life insurance 
company to the position of the actuary, in that upon the medi- 
cal selection of risks proposed for insurance largely depends the 
subsequent mortality experience. With the immense develop- 
ment of life insurance in all countries has gone the advancement 
of insurance medicine, from the crude methods of the London 
Equitable Society in 1762, when a health certificate was required 
bearing the signatures of two witnesses, one of whom had to be 
a physician, to the uniform blank for medical examiners pro- 
posed a few years ago at the International Congress of Medical 



LIFE INSURANCE AS A SCIENCE 

Directors at Brussels. To-day there are few general prac- 
titioners who have not, at one time or another, rendered services 
to life insurance companies in the examination of proposed risks, 
and the number of physicians regularly employed by these 
companies is constantly increasing. 

Insurance medicine has a large and valuable literature of 
its own, to which constant additions are being made as the 
result of special researches and increasing experience in a vast 
field with rare opportunities for the development of expert skill. 
The highly scientific character of this work is due, in a large 
measure, to the close relation of cause and effect. Errors of 
judgment in physical diagnosis, or the omission to note symptoms 
of incipient diseases, are certain to be followed by an unfavor- 
able mortality experience. While errors of judgment on the part 
of the general practitioner outside of hospitals as a rule remain 
unknown, such errors on the part of the medical examiner 
are a matter of permanent record and are comparatively easy 
to discover. 

Science of Neurology. 

The neurology of the future will render even greater service 
to insurance science than has been possible in the past. Brain 
diseases, as a class, are unquestionably on the increase in this 
and other countries, and there is some trustworthy evidence to 
support the view that insanity is increasing at a perceptible 
rate from year to year. No extensive statistical investigation 
has been made into the alleged increase in insanity, which may 
be attributed to the complex nature of the problem, the difficulty 
of exact definition, the undefined borderland of sanity and 
insanity, and many other causes; most of all, however, to the 
confusing effect of the improvement in the recovery-rate and the 
decreasing death-rate in state and private institutions. Actu- 
arial skill can be of great service to the medical profession in 
determining this question in much the same manner as in the 
investigation of the alleged increase in cancer by the emi- 
nent actuary, Mr. George King, cooperating with Dr. Arthur 
Newsholme. 



life insurance as a science 

Suicide. 
Suicide may also properly be referred to here as one of the 
problems of neurology and one of great importance to life 
insurance companies. Suicide is on the increase in this and 
other countries. For illustration, in American cities the rate per 
100,000 of population has changed from 12.0 during 1890 to 20.6 
during 1909.* Qualified investigations into the probable causes 
responsible for this much-to-be-deplored increase in self-murder 
would be of considerable financial value to insurance companies. 
Of the total mortality of insured males, aged forty-five and over, 
5.6 per cent, are deaths from self-destruction, and the financial 
loss to insurance companies is of much larger proportions than 
is generally assumed to be the case.f 

Surgery and Gynecology. 

The achievements of surgery are one of the glories of modern 
civilization and of both direct and indirect value to life insur- 
ance in making for an improved longevity and a resulting 
increase in the chances of a healthy life following a successful 
surgical operation. Beginning with the two principal factors — 
the introduction of anesthetics and the introduction of anti- 
septics — we have a long list of important modern discoveries in 
surgical methods which have done much to reduce human 
mortality and do away with needless suffering. 

Gynecology has an important relation to insurance science. 
Woman as an insurance risk is one of the perplexing problems 
in life insurance practice. In most of the mortality tables for 
the general population women at nearly all ages experience a 
lower death-rate than men, and the tendency would seem to be 
toward a still greater difference in favor of women in the 



* For an extended discussion of the suicide rate of American cities* 
with observations upon many interesting aspects of suicide in its rela- 
tion to life insurance, see the annual articles by the writer in The Spec- 
tator, New York, 1890-19 10. 

t Mortality Statistics of the Mutual Life Insurance Company of New 
York, 1843 to 1898, page 47. New York, 1900. 

13 



LIFE INSURANCE AS A SCIENCE 

future under modern conditions of life. In contrast, insured 
women have often proved a loss to the companies on account of 
certain subtle elements of adverse selection not readily com- 
prehended or allowed for in the medical examination of women 
as insurance risks. As a rule, the physical examination of 
women, for reasons of modesty and general custom, is made 
with less care than in the case of men; obscure pelvic diseases 
and diseases of the ovaries and uterus often exist, but they are 
quite concealed. Many other facts brought out by extensive 
experience, tend to complicate the matter, and all companies, 
therefore, exercise great caution in the acceptance of women as 
insurance risks. 

Science of Pediatrics. 
During the past thirty years the chances of death have 
undergone a material modification, and in most civilized countries 
the general death-rate is much lower to-day than it was during 
the early seventies. This improvement in human longevity, 
however, affects almost entirely the younger ages of life and in 
particular children under ten years of age. The modern 
treatment of the diseases of children, or the science of pe- 
diatrics, combined with improved measures of public hygiene, 
has resulted in a great saving of infant life, which goes far 
to balance the general decline in the birth-rate. Industrial 
insurance companies in particular are affected by this improve- 
ment, and the amounts now paid at ages under fifteen for a 
weekly premium of five cents are at least twenty per cent, 
greater than they were some thirty-five years ago, when this 
method of family insurance was first introduced into the United 
States by Mr. John F. Dryden. There are, however, general 
benefits resulting to life insurance practice as a whole from the 
gradual diminution of a needless waste of infant life. A healthier 
type of manhood and womanhood must develop from children 
free from the after-effects of acute infectious diseases so extremely 
prevalent in the past. 

14 



life insurance as a science 

Sanitary Science. 
The reduction of the chances of death is primarily the 
result of our increasing knowledge of the causes and true nature 
of diseases, the conditions favoring a high or low death-rate, 
and the necessary means and methods for their effective control. 
For want of a better term we use the one of "sanitary science," 
which includes both preventive medicine and public health admin- 
istration. As a first requirement it was necessary to perfect 
the official registration of deaths and the medical or legal certi- 
fication of their causes. Vital statistics form the groundwork of 
sanitary science as it has been developed during the past fifty 
years in all civilized countries. The history of disease preven- 
tion, or in particular epidemic diseases, has a large literature of 
its own, including the modern laboratory researches which have 
attained to a high degree of excellence. The great work of 
Creighton on Epidemics in Great Britain is an illustration of 
what is required for our own country before medical topography 
and geographical pathology will have reached the high position 
to which they are destined in due course of time. 

Medical Topography. 
The American life insurance companies of the first forty 
years of the nineteenth century are of little more than historic 
interest to us at the present time. The Pennsylvania Company 
for Insurances on Lives and Granting Annuities, the Massachusetts 
Hospital, the New York Life Insurance and Trust Company, 
the Baltimore Life Insurance Company, the Girard Life Insur- 
ance and Trust Company, the Ohio Life and Trust Company, 
and others, transacted but comparatively little business, so that 
by 1850 it is estimated only about thirty thousand life insurance 
policies were in force in the United States. In 1843, however, 
the organization of the Mutual Life marks the beginning of a 
distinct period of life insurance history which extends to 1875, 
when industrial insurance was introduced by the Prudential. 
A number of valuable contributions to the literature of public 
medicine and medical topography had been made, and it grad- 

15 



LIFE INSURANCE AS A SCIENCE 

ally became possible to obtain a more correct view of the value 
of human life in the different sections of the country. Bills of 
mortality were available for a number of important cities, and 
Sybert, in his Statistical Annals of the United States, published 
in 1808, could supplement his observations by two life-tables 
calculated for the use of the Pennsylvania Company for Insur- 
ances on Lives and Granting Annuities. One of these tables 
was derived from the records of the Episcopal Church, the other 
from the records of the Philadelphia Board of Health. The 
gradual development of public medicine is exhibited in the 
volumes of the Journal of Health, the first of which was issued 
in 1830. Ten years later a valuable report on the Sickness and 
Mortality of the Army of the United States, embracing a 
period of twenty years, was published by government authority, 
which contains much interesting and suggestive information 
relative to the health of different sections. This valuable 
document was followed by the classical report of Shattuck 
on the Vital Statistics of Boston for the period 1810-1841. 
In 1842 Forry brought out his treatise on the Climate of the 
United States and its Endemic Influences, which still retains 
its position as a work of great value. In 1845 Shattuck sup- 
plemented his earlier work by a Census of the City of Boston, 
which forms the first comprehensive statistical account of 
the population of an American city. Dawson and De Saussure, 
in 1849, published their Census of Charleston, S. C, which 
included observations on health, mortality and insurance. In the 
same year the first report of the Committee on Public Hygiene of 
the American Medical Association was published, which contains 
much valuable information on the medical topography of the 
most important sections of the North and South. The American 
edition of Tilt's Elements of Health was published in 1853 in 
Philadelphia, a book admirably arranged for the use of the 
period, with special reference to the requirements of life insur- 
ance companies. In 1854 Drake issued his medical topography 
on the diseases of North America, with special reference to the 
Diseases of the Interior Valley, unquestionably the greatest 
16 



LIFE INSURANCE AS A SCIENCE 

contribution to the medical topography of our country up to 
that time. Following Drake, Blodget, in 1857, issued his well- 
known treatise on the climate of the United States, which 
includes a valuable chapter on medical topography. The 
scientific interest of American life insurance companies in the 
subject of human mortality is made evident by the publication, 
in 1857, of a Report on Vital Statistics, by James Wynne, M. D., 
to the Mutual Life Insurance Company, but the expenses for 
which were shared by seventeen other companies, including all 
of the more important and representative institutions of the 
period. 

Longitude and Latitude. 

The office practice of the early American life insurance 
companies during the fifties was, however, in a large measure 
determined by very fragmentary data. Most of the observa- 
tions and conclusions of writers of the period on medical topog- 
raphy were derived from extensive travels, carried on under 
great difficulties and at considerable personal exposure to the 
ill-health-producing conditions described. The general appre- 
hension was not so much as to the probable unfavorable experi- 
ence in the country at large as in the Southern and Far Western 
sections. The general apprehension as to a high death-rate 
in the South was amply supported by the published mortality 
statistics of New Orleans, Mobile, and Savannah, and many 
able articles in the Southern medical publications. Dunglison, 
in his treatise on Human Health, one of the first works on 
hygiene published in this country, connects the science of public 
medicine with the science of insurance by a chapter on "Atmos- 
phere and Locality." An Englishman by birth, he stated that 
when he was about to leave Great Britain to occupy a situation 
for which he had been selected in the University of Virginia, 
a life insurance company of which he was a member declined 
to continue the insurance unless the premium was doubled. 
Dunglison wrote that this requirement compelled him to sacrifice 
or lapse his policy. Many of the assumptions with regard to 
health in Southern latitudes were, however, largely exaggerated. 

17 



LIFE INSURANCE AS A SCIENCE 

Dunglison's treatise did much to correct erroneous views, 
though on the whole a regard for truth compelled the author 
to admit the extensive prevalence of health-destructive con- 
ditions which it required time and an infinite amount of human 
labor to change for the better. Even at this early period, how- 
ever, it could be said with much truth that within the last century 
the value of life had increased progressively and was rapidly 
improving, but as long as the primitive conditions of pioneer 
life obtained it was out of the question for life insurance com- 
panies to develop their business on a large scale, especially in 
the Southern and Western States. Speaking generally, the 
slow growth of American life insurance during the first half- 
century, was in a large measure, due to the high mortality, 
the frequency of epidemic diseases, and the fragmentary vital 
statistics of the period.* 

The selection of risks for insurance, while primarily medical, 
takes also into careful consideration certain facts, most of which 
may be included under the general term "environment." These 
are locality of residence, housing, occupation, habits, and war, 
all of which are more or less comprehended in the department 
of preventive medicine and public and personal hygiene. 

Psychology. 
The immense development of modern life insurance, which 
has now become almost a universal provident institution, is pri- 
marily the result of the insurance education of the public through 
the solicitor or life insurance agent. Psychology alone explains 
the mental processes by which so abstract an idea as the theory 
of risk and insurance is reduced to "insurance consciousness" 
and made operative on conduct. It is not necessary, in fact it is 
not desirable, because tending to confusion of thought, that the 
abstract idea or even the business methods of insurance should be 



* Among the important contributions to the sanitary history of this 
period are Fenner's Southern Medical Reports, Vols. I and II, New- 
Orleans, La., 1849 an d 1850. See also the writer's essay on Life Insur- 
ance in the South Before the War, in " The South in the Building of 
the Nation," Richmond, Va., 1910. 
18 



LIFE INSURANCE AS A SCIENCE 

comprehended by the applicant for insurance protection, any- 
more than we require to know the chemical analysis of food- 
stuffs and the processes of their manufacture to enjoy and 
digest our daily meal. What is required is education in the 
simple elements of insurance protection, emphasized by intelli- 
gent suggestion and an effective appeal to the emotions. What 
the prospective policy-holder needs to know is the actual 
expense of risk transference, the amount of insurance provided 
in the event of certain contingencies, and the special contract 
provisions of the policy, which form the legal basis of the rela- 
tion of the insured to the company. 

The principles of risk and insurance are of too abstract a 
nature to be comprehended by the average mind, even after a 
considerable amount of intelligent explanation. The elements of 
insurance practice and results, however, are readily within the 
mental grasp of all but a small proportion of the public, and 
while in consequence of the enormous development of the busi- 
ness there exists a vague general consciousness of the insurance 
idea, it is but imperfectly understood and not sufficiently oper- 
ative on conduct. We are taught by psychology that "an object 
must be seen many times before it is rightly seen," and the 
abstract idea of insurance does not become concrete and operative 
on conduct until it has been emphasized and re-emphasized by 
the insurance instructor, who is called the agent or solicitor. 
The immense success of industrial insurance, with now more than 
sixty million policy-holders in the world, is due largely to the 
simplicity of the idea itself — so much to be paid each week — 
so much receivable in the event of death — which is readily 
within the mental grasp of all the people. In the more complex 
form of ordinary life insurance, especially when combined with 
investment, as in the case of endowments, the process of insur- 
ance education is much more difficult and results are secured 
more slowly. What is true of the progress of life at large is 
equally true of the progress of insurance, that "the adjustment 
of inner tendencies to outer persistencies must begin with the 
simple and advance to the complex, seeing that both within 



LIFE INSURANCE AS A SCIENCE 

and without complex relations, being made up of simple ones 
cannot be established before simple ones have been established." 

The Psychology of Suggestion. 
Abnormal psychology has already been briefly referred to 
under neurology. The psychology of suggestion in its special 
relation to the occurrence of mental epidemics is of considerable 
interest to life insurance companies. The present-day frequency 
of self-destruction and the unquestionable effect of suggestion 
in causing small epidemics of suicide of a local character is a 
source of considerable anxiety to the management of conservative 
insurance companies. What is summed up in a dissertation on 
The Wonders of Human Folly explains the need from time to 
time to recur to the experience of the past for an explanation 
of the experiences and occurrences of the present. Mackay's 
Memoirs of Popular Delusions, for illustration, throw much light 
upon recent experiences, and it has been said by him with much 
truth that while "time and progress have changed the mani- 
festation, the spirit of ancient folly lingers still. . . . From time to 
time the infatuation to acquire wealth speedily by an illegitimate 
shifting of the cards rather than by safe and equitable methods 
in the employment of capital and labor, seizes the people; and 
thus probably it will ever be until those who possess property 
shall be acquainted with the principles and laws of trade and 
shall at the same time be desirous to restore to the commer- 
cial character generally an inviolate and inflexible spirit of 
single-minded honesty." 

Anthropology and Anthropometry. 
In the selection of risks for insurance it is necessary to 
take into consideration certain broad principles of anthropology, 
in particular the primary distinction of race, or the varieties of 
mankind. Even the most cursory inquiry reveals important 
differences between the longevity of different races and peoples 
which no conservative insurance company can prudently ignore. 
" The physical peculiarities and geographical distribution of 



LIFE INSURANCE AS A SCIENCE 

the human family," wrote Pickering, " form one of the most 
interesting problems in history"; and in the words of Darwin, 
" There is no doubt that the various races, when carefully com- 
pared and measured, differ much from each other." Unfortu- 
nately, most of the earlier anthropologists took more interest 
in speculations as to the unity or plurality of the human species 
than in determining types of mankind by careful and extensive 
measurements and observations of physical, psychological, and 
pathological characteristics. 

Quetelet, to whom insurance owes much light on the theory 
of probability, was also the author of valuable works on normal 
man and anthropometry, which have done much to suggest the 
more recent investigations. The methods of Quetelet, as to 
both measurement and description, were followed to advantage 
in the more elaborate works of Beddoe, Roberts, Gould, Baxter, 
and many others. We are nearer to the truth to-day than we 
have been, but are yet far from having the required data for a 
practical anthropology or science of man applicable to the 
solution of pending problems of insurance. 

Geographical Pathology. 
Every advance in geography and the more accurate mapping 
of the surface of the earth contributes to the science of insur- 
ance. Medical topography and geographical pathology depend 
primarily upon accurate topographic surveys, and the immense 
advances which have been made in this direction during the 
past twenty years have been of great value to insurance science. 
The geographical distribution of disease is receiving more and 
more the intelligent consideration of the geographers of to-day. 
As an admirable illustration of what in time may develop into 
a distinct science, mention may be made of Haviland's work on 
the Geographical Distribution of Disease in Great Britain. Even 
the very early American geographers recognized the relation 
of physiographic and climatic conditions to health and 
mortality, and Guthrie, for example, in his geography published 
in 1795, refers to the subject at some length. Darby, following 



LIFE INSURANCE AS A SCIENCE 

Guthrie, contributed valuable observations in his various 
writings, particularly in his View of the United States, published 
in 1828, and in his Geographical Description of Louisiana, pub- 
lished in 1 81 6. The ultimate tendencies of geographical science 
in this particular direction are best illustrated in the Appendix of 
Maps to the Report of Sir H. H. Johnston, as Special Commis- 
sioner on the Protectorate of Uganda. These maps illustrate 
with exceptional clearness the average altitude and the salubrity 
' of each district, and it is not going too far to say that we have 
really more accurate information regarding this distant section 
of the globe than we have for many sections of our own country. 
The importance to insurance companies of similar investigations 
into our own Southern States, and in particular into our new 
possessions in tropical countries, cannot be overestimated. The 
works of Sir Henry Johnston illustrate the methods to be followed 
and the practical results to be attained. 

Geology and Mining. 
It is hardly practicable to separate a discussion of geology 
from the preceding discussion of geography in its relation to 
insurance science, since every geographical survey contributes 
to the development of the science of physiography by the mapping 
of surface geology and general topography. Areal geology often 
discloses important factors of soil composition, etc., which have 
a distinct and well-understood relation to health and mortality; 
as, for illustration, in the clay formations which underlie the 
Gulf coast of southeastern Texas, and which, in a large measure, 
are responsible for some perplexing sanitary problems at Houston 
and Beaumont. The comparatively recent development of scien- 
tific soil surveys may here be referred to, for many of the reports 
which have been published emphasize important points in med- 
ical topography. Of special interest, for illustration, are the 
reports for portions of the Yazoo Delta and the Gulf parishes 
of Louisiana. In addition, these reports usually contain a careful 
analysis of the elements of climate and other matters of interest 
and value to life insurance companies. 



LIFE INSURANCE AS A SCIENCE 

It is, however, in the field of economic geology, and the 
mineral industries and mining, that life insurance companies 
have, perhaps, the most important interest. The immense 
development of the mineral resources of the earth give employ- 
ment to a vast army of men whose occupations are almost with- 
out exception of a dangerous or unhealthful nature. Mining 
accidents are still of great frequency, and the present-day 
tendency does not seem to be toward a substantial reduction 
in the rate.* The problem of miners' phthisis is attracting much 
attention, especially in Utah and South Africa, where excep- 
tional conditions present unusual difficulties. The geological 
formation of coal areas determines in part the accident frequency 
from falls of roofs and gas explosions. The mineral composition 
of rocks has a direct relation to the frequency of industrial 
poisoning in the milling and smelting of copper and other 
metalliferous ores, while the accident liability of quarry men 
depends partly upon the geologic formation of the strata to 
be removed. 

Meteorology. 

Meteorology I assume to include both climate and weather 
service. The field is immense, for, as has been observed by 
Montesquieu, " The empire of climate is the most powerful of 
all empires," and the progress made by meteorology has been 
a material gain to life insurance science. The normal climate 
of any given locality is a factor of great importance in deter- 
mining health and longevity. The elements of temperature, 
barometric pressures, humidity, rainfall, prevailing winds, etc., 
are of considerable determining value, but as yet we have not 
the required standards by which accurately to measure the 
effects of these elements on human health under the varying 
conditions met with in different portions of the globe. We still 
speak of the "deadly climate" of the west coast of Africa or of 
French Guiana, with not much better knowledge of the facts 

* See Bulletin No. 90, Bureau of Labor, Sept., 1910, Washington, 
D. C, for a full discussion, by the writer, of the frequency and causes 
of fatal accidents in coal mining in North America. 

23 



LIFE INSURANCE AS A SCIENCE 

than when these expressions first came into use, under entirely 
different conditions of attempted settlement or colonization. 
While the climate and weather of India are the same to-day 
as at the time of the Great East India Company, the mortality 
of European troops has been reduced from seventy-six to 
sixteen per thousand. While it may be true, as Ripley holds, 
that "the English of to-day are no nearer to true acclimatiza- 
tion in India than they were in 1840," there can be no doubt 
that a more perfect knowledge of the elements of tropical 
climates and the resulting tropical hygiene have done much 
toward the ultimate solution of the white man's conquest of 
the tropics.* 

Industrial Technology. 

The applied sciences can only be discussed here in the most 
general way. All improvements in processes and methods of 
manufacture, as a rule, benefit the workmen by incidental im- 
provements in the sanitary condition of factories and workshops. 
The increasing proportion of risks written by life insurance 
companies on the lives of persons employed in manufacturing 
industries points to the importance of all improvements in indus- 
trial hygiene and their resulting relation to the diseases of 
occupations. The improvements in the processes of manufacture 
imply, as a general rule, a decreasing amount of waste in the 
form of dust, vapor, or gases, many of which are of a health- 
injurious character. The utilization of waste products, on the 
other hand, has led to new industries, many of which are inju- 
rious to health and life. The consolidation of industries in the 
form of industrial combinations or trusts, primarily for the 
purpose of effecting economies, has done much to improve 
sanitary conditions by providing new and larger factories with 
more light and better ventilation, so that it is safe to say that 
since the introduction of the factory system the average work- 
man has never been employed under healthier conditions than at 

* An important contribution to the subject is " Effects of Tropical 
Light on White Men," by Major Charles E. Woodruff, M. D., New 
York, 1905. 

24 



LIFE INSURANCE AS A SCIENCE 

the present time. To insurance companies the problems involved 
in industrial technology are, however, extremely complex and 
a never-ending source of anxiety. For illustration, the rela- 
tively new process of pulp manufacture is carried on by three 
distinct methods, the mechanical, the soda, and the sulphide, 
each of which represents different conditions affecting health 
and longevity, which require to be taken into account in the 
acceptance of this class of risks. In electrical engineering the 
truly astonishing progress which has been made during the 
past few years has resulted in entirely new conditions, which 
no prudent company can safely ignore. As an illustration, 
mention may be made of the introduction of electricity into 
mines which has been the subject of an official inquiry in 
England and by state mine inspectors in this country. The 
enormous development of electrical industries in general has 
resulted in entirely new conditions, which cannot be fully 
understood in the light of past experience. Mining engineering, 
perhaps most of all, requires serious consideration, and among 
other new factors affecting health and longevity, is the 
extensive introduction of coal-cutting machinery into the 
bituminous coal mines of our Western States. In ore-milling 
and smelting new processes are constantly supplanting old 
methods, and here again present-day practices cannot be 
determined by past experience. As an illustration of the bene- 
fits to health arising from the utilization of waste products 
reference may be made to the modern appliances in smelters 
by which many of the health-injurious vapors and gases are 
converted into profitable by-products.* 

Legal Science. 
The general conception of insurance law limits this term 
to the settlement of legal difficulties arising from the con- 
tractual relations of the company and the policy-holder. Most of 
the books which essay upon the subject, from Park and Marshall 

* In this connection Census Bulletin No. 190, June 16, 1902, on " Utili- 
zation of Wastes and By-Products " may be consulted to advantage. 

25 



LIFE INSURANCE AS A SCIENCE 

to the latest digest and dissertation, treat of insurance law in 
this narrow and restricted sense. We have not as yet a com- 
prehensive work which includes the relation of the companies 
to the state and public policy in addition to the relations at law 
of the company to its policy-holders and agents. The brief 
consideration which I can give to this subject precludes proper 
treatment of so complex a relation as that of insurance to 
legal science, and at best I can only indicate the more import- 
ant results of law, jurisprudence, and social regulations affecting 
insurance interests. 

Under modern conditions the conduct of a life insurance 
business is beyond the reach of individual or private enter- 
prise. It is to-day an accepted principle of government that 
"life insurance is a business of so sacred a character, and involv- 
ing issues so important to the national welfare of each country, 
that it must be the subject of special legislation in order to 
safeguard the interests of the insured. ... It is their savings in 
the shape of premiums and their accumulations which con- 
stitute almost the entire resources of every life insurance com- 
pany, and it cannot be a subject of unconcern to any government 
that its citizens should have made provision for the future to so 
large an extent, and that the security for the eventual payment 
of the sums assured, as they mature, should be guaranteed by 
the solvency and sound investments of the companies that 
underwrite the contracts. " Insurance companies derive their 
existence from charters specially granted, but in conformity 
to the general corporation laws of the different states. Corpo- 
rations are by law endowed with perpetual succession, or, in 
other words, are artificial persons having no necessary or 
natural term of life, and they may be regarded as an exten- 
sion of individual capacity. The earlier charters of American 
insurance companies illustrate the crude ideas regarding the busi- 
ness of life insurance at a time when the term "insurance," in the 
words of Park, was practically equivalent to "marine insurance." 
Almost from the beginning of the business of insurance the 
importance and necessity of some form of state supervision was 
26 



LIFE INSURANCE AS A SCIENCE 

recognized, and we meet with the inception of the present form 
of state supervision in a Massachusetts statute of 1827, which 
required the companies to report annually as to the condition 
of their business. The growth of the business and the extension 
of operations to other states developed the present system of 
state supervision, which had its origin in a law passed by the 
legislature of Massachusetts, establishing a separate depart- 
ment for the supervision of insurance interests, in 1855. To-day 
such departments exist in every state and territory, with more 
or less comprehensive powers for supervision and control. The 
resulting problems are of most serious concern to the companies. 

State Supervision of Insurance. 
The insurance laws of the different states are often widely 
at variance with one another. The remark of Mr. Griggs, 
ex- Attorney General of the United States, that while "the 
interpretation of the law is a science, law-making is not," 
applies with special force to the insurance legislation of the last 
thirty years. When, in 1876, Mr. C. C. Hine issued his volume 
on Insurance Statutes, within six years of the issue of a similar 
work by Wolford, he could truthfully say that "the insurance 
laws of five years ago are almost obsolete, and in their stead 
new statutes have come upon the books of almost every state 
and territory." The process of grinding out laws has gone on 
with undiminished energy, and the opinion of a learned judge 
that "no attorney is bound to know all the laws" may give some 
comfort to the law officers of insurance companies confronted 
by the problem of digesting the large number of special statutes 
passed annually or biennially by forty-nine different states and 
territories for the ostensible purpose of regulating the insurance 
business. In marked contrast, we may reflect upon English 
legislation affecting insurance interests, which since 1870 has 
practically remained the same*. Mr. Griggs, in his address 
on "Law- Making," properly remarks that "history of the 

* The English Assurance Companies' Act of 1909 is fully discussed 
in Chapter VIII. 

27 



LIFE INSURANCE AS A SCIENCE 

English law reveals change and growth, but growth by slow 
and deliberate processes." It would be an immense step in 
advance towards the perfection of American insurance law if 
a similar habit of mind prevailed in this country. 

The taxation of life insurance companies need only be re- 
ferred to here as an important problem of insurance company 
administration. If it is the duty of the state to encourage thrift 
or efforts on the part of the people toward economic independence 
and a secure position above the need of state aid, it is certainly 
a paradox to meet with an increasing tendency to tax life 
insurance policy-holders out of a relatively large share of their 
annual savings. In many countries other than the United States 
insurance is supervised and regulated by some central au- 
thority — in England by the Board of Trade, in France by the 
Minister of Commerce, etc. There must come a time when 
the burden, expense, and annoyances incident to supervision by 
some forty-nine different insurance commissioners of states and 
territories will become intolerable and some form of federal 
supervision must be the result. 

International Law. 
An increasing number of life and fire insurance companies 
are extending their fields of business operations to foreign coun- 
tries, and in a few cases American life companies transact busi- 
ness in most of the civilized countries of the earth. Without 
wishing to underrate the ratio of progress made by life insurance 
companies of other countries, it is generally conceded that the 
American life insurance companies abroad are more aggressive, 
and as a rule attain more readily to a commanding position 
than the home companies. As a result, there is, at first, much 
local antagonism to foreign insurance companies, to which, 
in part, at least, must be attributed the burdensome regula- 
tions which have been imposed in certain countries upon 
American insurance companies. On the other hand, there can 
be no doubt that during the past quarter of a century the 
tendency has been politically and socially to draw states together 



LIFE INSURANCE AS A SCIENCE 

by the strong attraction of "common political sentiments, 
common aspirations and common interests of a permanent 
kind." Insurance may rightly claim to be one of the forces 
making for international harmony and good will. 

Contract Law. 
All insurance is in the nature of a contract between the 
company and the insured, who is usually referred to as the 
policyholder. The policy is the instrument which defines the 
respective rights and duties of the contracting parties, who are 
assumed to be aware of the fact at law that "a contract is a 
deliberate engagement between competent parties, upon a legal 
consideration, to do, or to abstain from doing, some act." Out 
of the contractual relation and its unavoidable disputes, mis- 
understandings, etc., has resulted a mass of litigation and 
court decisions usually comprehended under the term "insur- 
ance law." A retrospect over the many years since, in 1601, the 
"Court of Insurance" was established by Queen Elizabeth, and 
the sixty-odd cases tried during its entire history, to the present 
time would carry me far beyond the present purpose. Suffice 
it to say that the development of insurance law has gone for- 
ward with the growth of the business until this term now com- 
prehends a variety of subjects unknown and unthought of at 
the time when Park and Marshall first published their works, 
about a century ago. Considering the enormous extent and 
highly complex character of the insurance business, it is a matter 
of surprise to find that, after all, the amount of litigation should 
have been so small. The tendency has been constantly towards 
a contract free from restrictions likely to lead to litigation, until 
the life insurance policy of to-day is practically a promise to 
pay a certain sum on the occurrence of a given event, except in 
the case of fraud. There has always been an unfortunate dis- 
position on the part of the courts to construe a policy of in- 
surance more upon the grounds of sentiment than upon the com- 
mon law of contract and fraud. Mr. Davies, the eminent solicitor 
of the Mutual Life, has discoursed upon this matter in so able 
29 



LIFE INSURANCE AS A SCIENCE 

and interesting a manner that I take the. liberty of quoting to 
some extent from his lectures on the law of life insurance: 

"A suit upon a life policy is an especially difficult one to 
defend for several reasons. In the first place, there exists in 
this country a very general prejudice against corporations, 
which inclines a jury to view with favor any claim by an indi- 
vidual against one of them. Then the plaintiff is usually a 
widow or some other dependent of the deceased, and the contrast 
is strongly drawn by the counsel arguendo between her poverty 
and the heaped-up millions of the defendant, the corresponding 
liabilities of the latter being carefully kept in the background. 
. . . And to these considerations must be added another of a 
much higher character, that natural human instinct which leads 
us all to speak well, and endeavor to think well, of the dead. The 
fall of the curtain upon a human life covers at the same time 
his faults and vices, and adds enormously to the difficulty of 
establishing to the satisfaction of a jury facts which are notorious, 
but which blacken his memory. The very neighbors, who during 
a man's life denounce him as a worthless sot, will, when called 
as witnesses in a suit upon a policy on his life, reluctantly admit 
that he perhaps on rare occasions drank to excess, but not to 
an extent to impair his usefulness or affect his health. So 
when a suicide takes place the associates of the deceased at once 
begin to think that they had previously noticed symptoms of 
aberration of the mind, quite sufficient to justify a strong sus- 
picion of his sanity, although no such idea had ever occurred to 
them before the catastrophe." 

The Law of Agency. 
The life insurance agent is, as a rule, an appointed employee 
of the company and under contract to perform certain services 
in return for a stipulated compensation. The employment of 
agents is so universal that but few policies are obtained other- 
wise than through these representatives of the company. Out 
of this condition some very important legal questions and 
problems have arisen, aside from the occasional difficulties and 
misunderstandings between the company and its employees. 
The agent, as a rule, is the only personal representative known 
to the insured, and the agent's position is thus one of very con- 
siderable responsibility and importance. The company naturally 
30 



LIFE INSURANCE AS A SCIENCE 

aims at a narrow limitation of the agent's powers as to the issue 
or modification of the contract between the company and the 
insured, and most of the policies issued contain a clause to the 
effect that "no condition, provision, or privilege of this policy 
can be waived or modified in any case, except by an indorse- 
ment signed by an executive officer of the company." 

Insurance and Public Policy. 
Insurance in its relation to public policy presents some very 
interesting problems of law and jurisprudence. A policy of 
insurance is issued upon the faith of the statements made in 
the application for insurance, and the applicant is required to 
warrant the truth of his statements. The effect of warranty is 
to insure the accuracy of the state of affairs alleged in it; and 
consequently the greatest care in making a declaration of them 
is requisite. There has been a considerable amount of litigation 
and resulting decisions of the courts on the question of conceal- 
ment and misrepresentation, but as a rule the decisions have 
been in favor of the insured. It should be manifest that it is 
contrary to public policy to encourage fraud, concealment, and 
misrepresentation, by means of which insurance is obtained 
under conditions which would have precluded the issue of the 
policy had the facts been truthfully stated to the company. 
A common form of misrepresentation is as to the present state 
of health of the insured, particularly in cases where even the 
most advanced methods of medical diagnosis cannot establish 
with entire accuracy the facts at the time the application for 
insurance is made. Losses thus sustained by the companies are 
to the injury and disadvantage of the honest policyholder, and 
by this much the true progress of the business is retarded. A 
strict construction of the statute of frauds is, therefore, one of 
the most certain means of advancing life insurance interests. 

Insurance Economics. 
The economic theory of risk and insurance has only received 
incidental consideration by writers on economics and social 

3i 



LIFE INSURANCE AS A SCIENCE 

problems, with the notable exceptions of Willett and Macleod. 
This is unfortunate, for insurance, in one way or another, reacts 
upon the whole economic life of the people, and there is no hope 
of a rational political economy until all the elements of social 
and economic progress are taken into account. The economic 
value and utility of insurance are important and proper subjects 
of economic inquiry, and the immense progress of the business 
demands the impartial and critical consideration of qualified 
experts in economic and social science. The view of Macleod 
that "annuities or rights to receive a series of future pay- 
ments " are negative economic quantities, under which term 
he comprehends all instruments of credit, shares in commercial 
companies, policies of insurance of different kinds, etc., does 
not seem to have been accepted by other writers on economic 
theory. 

The earlier writers on the investments of the working class 
gave considerable attention to life insurance and its relation to 
the general welfare. Gregg, among others, wrote in 1851, or 
three years before the practical beginnings of industrial insur- 
ance in England, that "life insurance policies offer one of the 
most important channels of investment for the savings of all 
classes" ; and he adds, " Of all modes of employing small savings, 
there is none which we should so earnestly desire to become 
general among workingmen; none which appears to us so de- 
serving of the fostering care of the legislature; none which, if 
universal and habitual, would do so much to diminish those 
cases of utter and helpless destitution which press so heavily 
on the resources of the community in the shape of poor-rates, 
and which are the fruitful parents of a long progeny of calamity 
and crime."* 

The progress of insurance since this was written challenges 
the admiration of the world. In the United Kingdom the 



* A most interesting investigation into the subject of savings of the 
poor is contained in a Parliamentary Report on " Savings of the Middle 
and Working Classes," ordered by the House of Commons, to be printed, 
July 5, 1850. 

32 



LIFE INSURANCE AS A SCIENCE 

industrial companies alone, excluding collecting and other 
friendly societies, have now some thirty million policies in force 
on the lives of workingmen and their families. The question 
raised by Prof. Falkner as to whether "the growth of insurance 
in recent years has been mainly among the well-to-do," can be 
emphatically answered in the negative. In fact, life insurance, 
almost from its inception, has met with greater appreciation 
among those who, for want of a better term, we speak of as the 
working class. This aspect of the business is one of economic 
history rather than theory, but here again we find that, with 
few exceptions, writers on the progress of economic and social 
institutions have made little of a fact which is none the less of 
profound economic importance and significance. 

Insurance History. 

The study of insurance history and the history of asso- 
ciations, gilds, and friendly societies, is a most instructive 
chapter in economics. Far back into ancient history careful 
students of commerce and navigation have traced at least a 
semblance of our present form of marine insurance. Anderson's 
History of Commerce contains some very suggestive illustra- 
tions of a possible connection of present-day methods to those 
of an earlier and almost forgotten time. Turner, in his History 
of the Anglo Saxons, and Eden, in his State of the Poor, throw 
much light on primitive methods of solving social problems in 
conformity to the principles of association. Walford, in his 
work on Gilds, and Toulmin Smith, in his great work on English 
Gilds, with the introduction by Brentano, are indispensable 
sources of information to the student who would rightly under- 
stand the foundations upon which the present massive structure 
of insurance rests. 

But other materials of great value are readily available to 
the student of insurance and economic history. The great work 
of Walford, unhappily not completed beyond the letter H in the 
Insurance Cyclopaedia, published between 1871 and 1880, is a 
monumental work of human industry and learning. Of more 

33 



LIFE INSURANCE AS A SCIENCE 

recent works on insurance history mention may be made of 
Martin's History of Lloyds and Marine Insurance in Great Britain, 
published in 1876; the century History of the Insurance Com- 
pany of North America, published in 1885; the semi-centennial 
History of the New York Life Insurance Company, published 
in 1896; the quarter-century History of the National Fire 
Insurance Company of Hartford, published in 1897; tne century 
History of the Norwich Union Fire Society, published in 1898; 
the History of the Prudential Insurance Company of America, 
published in 1900, and finally the half-century History of the 
Springfield Fire and Marine Insurance Company, published in 
1 90 1. I must also not fail to mention a reprint of Documents 
Relating to the Early History of the Scottish Widow's Fund 
and Life Assurance Society, published in 1901. The student 
of economic history and economic institutions will find much 
of value in these volumes which will aid him towards a more 
correct interpretation of the factors which have made for social 
progress during the nineteenth century. 

Insurance as an Element of Commerce. 
Any effort to trace the origin and growth of insurance must 
necessarily take into account the development of navigation 
and commerce during the last three hundred years. Evidence 
is not wanting that even among the nations of antiquity marine 
insurance in some form or other was not wholly unknown. Park 
and others have traced the beginnings of marine insurance to 
very early periods, but it has remained for the last three cen- 
turies to develop the system to its present state of universal 
utility. Even the most casual study of the history of navigation 
and commerce reveals the immense advantages resulting from 
the practice of marine and fire insurance. In the words of 
McCulloch: "Without the aid that it affords, comparatively 
few individuals would be found disposed to expose their property 
to the risk of long and hazardous voyages; but by its means 
insecurity is changed for security and the capital of the merchant 
whose ships are dispersed over every sea and exposed to all 

34 



LIFE INSURANCE AS A SCIENCE 

the perils of the ocean is as secure as that of the agricultural 
risk. He can combine his measures and arrange his plans 
as if they could no longer be affected by accident. He has 
purchased an exemption from the effects of such casualties; 
and applies himself to the prosecution of his business with that 
confidence and energy which nothing but a feeling of security 
can inspire." 

The principle of insurance in its application to commerce 
is, however, no longer limited to marine and fire insurance. The 
last fifty years have seen the practical development of the 
insurance idea in various other directions, of which I may 
mention the following: Accident, health, and employers' liability 
insurance; fidelity, surety, bond, mortgage, and title insurance; 
plate-glass, elevator, and boiler insurance; hail, windstorm, and 
tornado insurance; and finally, live-stock and burglary insur- 
ance. All of these have assumed the character of instruments 
of commerce and are in theory and fact an indispensable element 
of the commercial development of the present age. 

Modern Tendencies. 
The present-day tendency to industrial organization and 
the combination of capital is reflected in the status of the insur- 
ance business of the United States, which has followed the gen- 
eral commercial trend of the age. Of the ordinary life insurance 
business, six companies have fifty-six per cent, of the total 
insurance in force; of the industrial business, ninety-three 
per cent, of the policies are with three of the companies 
transacting this form of insurance; and of fraternal insurance, 
so-called, forty per cent, of the membership is in five of 
the principal organizations. The resulting gain has been very 
considerable, especially in the direction of enhancing the general 
security of the business and public confidence in this form of 
individual and family protection. This tendency has not ope- 
rated injuriously to the development of a healthy spirit of 
competition, which may be illustrated by the fact that there are 
to-day about one hundred and seventy ordinary and twenty - 

35 



LIFE INSURANCE AS A SCIENCE 

three* industrial insurance companies transacting business in 
the United States. The problem of wealth and its distribution 
may be summed up in the statement by Thompson that "the 
property of the most numerous class, that is, the poorest, is 
coming evermore to the front as a great problem of modern 
statesmanship." Life insurance is to-day one of the most im- 
portant factors in the re-distribution of wealth, and perhaps of 
all the methods the most equitable and effective. It reaches 
every stratum of society and enables the poorest to provide for 
the future a sum of money which in every sense of the word 
represents capital obtained by individual efforts as the result of 
habitual saving and prudent self-denial. The insurance com- 
panies collect these savings in small amounts, which range as 
low as three cents a week, or assume considerable proportions 
per annum; the accumulations form the assets of the companies 
and as such they become available for profitable investment in 
productive industries and trades; they are redistributed through 
payments to policyholders as claims or matured endowments or 
annuities, in sums which range from an amount sufficient to pay 
for a burial to returns which represent a considerable fortune. 
As Walter Bagehot said some years ago, "People insure their 
lives who save in no other way, "and the vast sums accumulated 
by life insurance companies, now nearly four billion dollars, 
represent an amount of economic security and evidence of an 
effective adaptation to the exigencies of modern life without a 
parallel in economic history. 

Transportation. 
The field of insurance is primarily the city and surround- 
ing territory, but by degrees the more sparsely populated 
sections of the country have become available in consequence 
of the development of the science of transportation. From 
92,000 miles in 1880, the railway system of the United States 
has grown to over 250,000 miles in 1909, opening immense 

* Seventeen of the Industrial companies also transact ordinary in- 
surance. 

36 



LIFE INSURANCE AS A SCIENCE 

areas to settlement and leading to the subsequent development 
of cities and towns, which necessarily contribute towards the 
further extension of every form of insurance. The remark- 
able development of electric railways has opened large sec- 
tions of the agricultural regions previously outside of the sphere 
of profitable business operations. Railway and navigation com- 
panies employ a large number of men exposed to a considerable 
accident liability, which requires special consideration. While 
great improvements have been made in railway transporta- 
tion tending to diminish the mortality from fatal accidents, 
especially in connection with the coupling and uncoupling of 
cars, the mortality of certain classes of railway employees 
remains very considerably above tbe normal of men of corres- 
ponding age employed in less dangerous occupations. There 
has not been the reduction in the death-rate which earlier 
discussions and the passage of the laws relative to the preven- 
tion of accidents seemed to warrant. The problem remains 
one of serious concern to insurance companies transacting either 
a life or accident business, or both. 

In still another direction are insurance companies interested 
in transportation science, and that is the opportunities for safe 
and profitable investment in railway bonds and mortgages. 
An incidental result of great importance has been the opening 
of new agricultural areas with a corresponding opportunity for 
profitable farm loans, which are perhaps the most advantageous 
and satisfactory investment of insurance companies, if made with 
the necessary knowledge of local conditions of soil and climate. 
There is, therefore, abundant evidence of the close relation of 
the science of transportation to the science of insurance. 

Banking and Currency. 
Banking, currency, and public finance are fundamental 
factors determining insurance progress. With more than 
$3,500,000,000 of assets invested in interest-bearing securities, 
the companies have a vital stake at issue in all questions of 
sound money, a stable currency, and healthful trade condi- 
37 



LIFE INSURANCE AS A SCIENCE 

tions. Of the assets of the companies, nearly eighty-five per 
cent, are securely invested in bonds, stocks, and mortgages, 
including every form of approved federal, state, and municipal 
indebtedness, first-class railroad bonds, farm loans, etc. The 
necessity of earning a certain rate of interest demands the 
most experienced judgment in making these investments and 
a watchful eye on general banking and trade conditions. All 
of the great financial reform measures by which this country 
has reached its pre-eminent position in the world's money 
market — the National Banking Act of 1863, the resumption 
of specie payments in 1878, the defeat of the free silver craze 
in 1896 and 1900, and, finally, the passage of the Gold Stan- 
dard Act — have contributed to the progress and stability of 
life insurance during the past forty years. In fact, such pro- 
gress would have been out of the question as long as there 
existed "great dissimilarity in the laws governing banks in 
the several states, precluding uniformity, security, and safety." 
Hepburn points out that, in 1861, "there were then some 
7,000 kinds of denominations of notes and fully 4,000 spurious 
or altered varieties." It is not a matter of surprise that under 
these conditions, between 1851 and 1861, the actual increase 
in life policies in force should only have been about 30,600. 

But the influence of life insurance extends to every aspect 
of finance and trade. With its necessarily intimate relation to 
banks and trust companies, life insurance assumes the position 
of a regulating medium to which in no small degree may be 
attributed the more perfect control of the money market in 
hours of uncertainty and impending financial disaster. If 
crises and depressions are today a more remote element of 
business probability, and if this is due, in part at least, to "the 
greater skill and prudence exercised by bankers as the result 
of experience," I do not go too far when I hold that this gain 
is due in a measure to the fact that there are many impor- 
tant banks and trust companies which have on their boards 
of directors one or more men who are also officers of life and 
other insurance companies. Our financial history of the past 



LIFE INSURANCE AS A SCIENCE 

ten years shows conclusively the influence of conservative life 
insurance finance as a restraint and preventive of a recurrence 
of the disastrous series of panics between 1825 and 1893. 

Social Science. 

Sociology and social science, including all the more im- 
portant divisions, is so comprehensive a term as to preclude 
consideration in detail. Social structure alone, as revealed by 
the census and other statistical investigations, bears a more 
or less direct relation to insurance development and progress. 
Census inquiries are now made with more skill and accuracy 
than heretofore, and every new investigation brings out new 
facts and tendencies of society in the process of evolution 
from homogeneity to heterogeneity. The mere statistics of 
past and present population, its distribution by rural and 
urban communities, its composition by sex, age, color, nativ- 
ity, and occupation, are all elements of a determining nature 
which it is necessary to know for the more intelligent control 
of insurance practice. Without an accurate knowledge of the 
population and its distribution by age and sex, no life-tables 
could be worked out for the general population, and without 
a careful analysis of the facts of physical and social environ- 
ment, no definite business policy could be established. 

Most important is the relation of insurance to the family. 
Life insurance as a social institution primarily contemplates 
the certain and effective protection of widows and orphans, 
or, in other words, an extension of conjugal duties result- 
ing from marriage under the existing conditions of modern 
life. Many of the earlier insurance companies were, in fact, 
called "Widows' Schemes," or "Widows' and Orphans' Assur- 
ance Societies," or, in the words of Price, "Institutions for the 
Benefit of Widows." The biological problems resulting from 
marriage and its relation to insurance are of much importance, 
and I may point out that among the most involved calcula- 
tions of insurance practice are those of survivorship in marriage. 
Interesting data and calculations on this subject are to be found 

39 



LIFE INSURANCE AS A SCIENCE 

among other sources in a comprehensive work on the Madras 
Military Fund, which includes observations on the mortality of 
wives, the rate of mortality and re-marriage among widows, 
wives, chance of widowhood, etc. Westermarck has contributed 
the most important investigations on the " Statistics of Marriage" 
derived from Danish data, while Westergaard has a dis- 
cussion on the subject in his treatise on Mortality and Mor- 
bidity, which, unfortunately, has not been translated into 
English. 

Considerations of the chances of survivorship in marriage, 
the well-established lower mortality of wives as compared with 
husbands, and the practical certainty of surviving children, point 
to life insurance as the most effective method yet devised to 
prevent suffering and dependence upon the charity of others. "A 
family," wrote Professor Sumner, some thirty years ago, "is 
a charge which is capable of indefinite development," and 
whatever may be its ultimate evolution, there can be no ques- 
tion but that life insurance acts as a conserving factor in human 
marriage and develops the altruistic impulse of the husband 
toward the wife and of the father toward the children. In the 
homely language of insurance parlance: "Wives often object 
to insurance, but widows never do," and I may add the glow- 
ing tribute of Gilbert Currie, one of the earlier writers on insur- 
ance, that "if we only could call from the dusty archives of 
these venerable institutions the huge piles of molding ledgers, 
and extract from their records, what tales would be unfolded 
of miseries prevented, griefs and sorrows soothed, the briny 
tear wiped from off the cheek, the balm of consolation imparted, 
the widow's heart made to rejoice with gladness, and the help- 
less orphan to sing for joy! This is no flight of the imagina- 
tion, no picture of fancy, no figure of speech; it is sober reality, 
the voice of experience, and the simplicity of truth." 

Life Insurance and Social Reform. 
Of the problems of social wellbeing there are few of greater 
importance than the development of voluntary thrift and 
40 



LIFE INSURANCE AS A SCIENCE 

resulting economic freedom of the masses. What Mill calls 
" self -regarding actions" and "actions which are not primarily 
or chiefly self-regarding" admirably illustrates the fundamental 
difference between insurance and mere saving habits. The 
hope of an earlier day has been realized, and life insurance at 
the outset of the twentieth century is a universal provident 
institution. The view prevails, as expressed by Marshall, that 
"at last we are setting ourselves seriously to inquire whether 
it is necessary that there should be any so-called lower class 
at all." Life insurance precludes the necessity of abject poverty 
and pauperism. Life insurance eliminates, for all but the lowest 
and most depraved, the possibility of a pauper burial. It 
has placed within the reach of the large majority at least a 
temporary barrier between death and dependence and the poor- 
house. We are still far from having realized all that is implied 
in the insurance idea and we still suffer much from an unsound 
social philosophy. We are constantly in danger of delusive 
schemes of social reform not based on individual effort and 
voluntary adaptation to existing economic conditions. The 
tendency, however, I believe, is in the right direction, and 
every year sees an advance toward a higher degree of social 
wellbeing. Social reform of the right kind must come from 
within; must be the result of individual character and indi- 
vidual struggle. This is the social aspect of insurance — that 
is, prudently to economize, to save, to invest, to insure for the 
financial protection of self and others in old age or at death. 
There is nothing in the annals of the poor more remarkable 
than the rise and progress of provident institutions, from burial 
clubs and friendly societies to the different varieties of life 
insurance adapted to every stratum of society. For wage- 
earners, or the industrial element of the population, industrial 
insurance may rightfully claim to meet the requirements of 
Currie of "its being such a system as the circumstances and 
conditions imperatively require, namely, the provision of means 
whereby they are enabled to help themselves and their families 
without depending upon the assistance of their neighbors or 

4i 



LIFE INSURANCE AS A SCIENCE 

compromising in the smallest degree their independence of 
character." I may also quote his conclusion, applicable to 
the conditions of today, that "every poor man is now called 
upon to fulfill his most sacred ©bligation, an obligation as 
binding upon the hard-working, honest man as upon the most 
opulent individual, parent, or husband in the world — to his 
wife and his helpless offspring." It is the mission, the aim, 
and the object of insurance, primarily and chiefly, to diminish 
dependence and increase by individual effort, frugality, and 
forethought the social and economic independence of the masses. 

Insurance as a Career. 

While insurance may rightfully claim recognition as a 
science, as a business pursuit it is still far from being a pro- 
fessional career. The general aspect of insurance as a career 
or business pursuit has been discussed in much detail by the 
Honorable John F. Dryden in a paper contributed to a series 
of articles on the subject to the New York Tribune.* Of late 
years insurance education has been introduced into colleges and 
universities, sometimes in connection with general instruction 
in commerce and banking, as, for illustration, in the Wharton 
School of Finance, University of Pennsylvania, and in the 
University of Wisconsin; or occasionally as an independent 
course of instruction, as, for illustration, at Yale. In a general 
way, however, it is yet too early to speak of insurance educa- 
tion as professional training. The general method of instruc- 
tion in insurance is still of too elementary a character, the 
elements of success in office and field administration are too 
ill-defined, and the principles of business conduct are too far 
from being reduced to scientific uniformity to permit us to 
speak of insurance as a professional career. 

But as a business pursuit it is deserving of the most serious 
consideration, and I may repeat the glowing tribute to the 
insurance agent by Elizur Wright that "among the honorable 

* Reprinted in " Addresses and Papers on Life Insurance and Other 
Subjects," by John F. Dryden, Newark, N. J., 1910. 
42 



LIFE INSURANCE AS A SCIENCE 

workers in the civilized world to whom the public as well as 
the insured will die indebted, we give faithful and successful 
life insurance agents a high place. It is hardly possible to 
believe that a life insurance agent can achieve any long con- 
tinued success without bringing into action some of the noblest 
qualities of a sterling man, and no field that we know of is 
more inviting to an ambition that would devote the best of 
talents to the benefit of society at large and individuals in 
particular." 

Insurance Libraries. 

A p re-requisite for an effective university education is the 
need of comprehensive or approximately complete insurance 
libraries. All of the more important companies have libraries 
of more or less extent on insurance, statistics, and related 
sciences, but the three libraries deserving of special mention 
are the Walford collection of the Equitable Assurance Society, 
the Bibliotheque de l'Utrecht, and the library of the Prudential 
Insurance Company of America. The Prudential library of 
insurance and statistics includes over 25,000 volumes and 
pamphlets, supplemented by an extensive collection of data 
on every subject relating to insurance science. The Boston 
Insurance Society has a good library, of which a catalogue has 
been published. The Life Insurance Company of Utrecht has 
published a valuable catalogue, which has been re-issued in a 
fifth edition in 1903. No comprehensive bibliography of insur- 
ance exists, but Pocock, in 1840, published a small volume, 
which is now extremely rare, including a list of the more im- 
portant works on insurance, the doctrine of chances, gambling, 
lotteries, etc., which had been printed up to that time. The 
list, however, is far from complete. Probably the most com- 
prehensive collection of works on insurance and related 
subjects is the library of the Institute of Actuaries of Great 
Britain. 

Religious Aspects of Life Insurance. 

The relation of insurance science to religious agencies and 
religious influence, both individual and social, is implied in the 
43 



LIFE INSURANCE AS A SCIENCE 

earlier discussion of the ethical sanction of insurance as a 
method of social amelioration. Professor Clark has well said 
that "certain modern religious problems need to be appre- 
hended as well from the material as from the spiritual side," 
and of these life insurance has, almost from its inception, re- 
ceived the sanction and active encouragement of the Christian 
Church. The first name on the list of the incorporators of the 
Amicable Society for the Insurance of Lives, organized in 1705, 
is that of the Bishop of Oxford. The first comprehensive and 
practical work on life insurance theory was published in 1762 
by the Rev. Richard Price, a Unitarian clergyman. Some of 
the earliest works on annuities and reversions developed out 
of considerations of the value of church leases and inquiries 
into the tenant rights of church and other foundations. Some 
of the first steps in the direction of improving the tables and 
premium rates of burial clubs and friendly societies were made 
by ministers of the Established Church, and I may mention 
the Rev. Mr. Becher, whose works are still valuable for instruc- 
tion and reference. It has been for many years the practice 
in England to organize burial clubs and insurance societies of 
children of Sunday-schools, which, as far as I know, have 
served and continue to serve a useful purpose. The first 
two insurance organizations in the United States, one of 
which is still in existence, were the Presbyterian Ministers 
Fund, established in 1759, and the Society for Episcopal Clergy- 
men, established in 1769. An insurance company for clergy- 
men has been in existence in London since 1846, and among 
the efforts of the Salvation Army is an Industrial Insurance 
Department, which has made satisfactory progress. 

These illustrations will suffice to show that the insurance 
idea has the sanction of the Church and religious approval 
generally, although some have held and still hold that "these 
institutions are conducted on a principle contrary to a trust 
in Providence." In answer it has properly been argued that 
"life insurance takes its rise in one of the most respected features 
of human nature — foresight, or a provision against contingent 

44 



LIFE INSURANCE AS A SCIENCE 

evils ; and having most particularly in view the succor of the 
widows and fatherless, it is essentially a moral and humane 
institution. Life insurance should not, therefore, be considered 
as an interference in any degree with the course of Providence, 
which some rashly assume it to be, but, on the contrary, the 
taking advantage of a means kindly offered by Providence for 
our benefit." This is the view which prevails at the present 
time and which gives religious as well as moral sanction to 
the development of life insurance as a universal provident 
institution. 

Insurance as a Science. 

As a comparatively new department of human inquiry 
and action, insurance found no place in the earlier classi- 
fications by Bacon, Comte, and Spencer, but no scientist 
of the future and certainly no economist can rightly ignore 
what, in time, will become a tremendous force making for 
the material wellbeing and the economic independence of the 
vast majority of civilized people in all portions of the earth. 
It is equally certain that the insurance manager of the 
future will give more and more consideration to the teachings 
of both the abstract and concrete sciences, with the aim to 
adjust the practical administration of insurance to sound 
scientific theory derived from extensive investigations into the 
vast range of related sciences. For the future conduct of the 
business the demand will be for trained minds, qualified to 
deal with problems more complex and involved than the prob- 
lems and difficulties of the past. As it has well been pointed 
out by the Honorable John F. Dryden, in a paper on "Insur- 
ance as a Career:" "In a general way it may be said that the 
scientific temperament is most likely to lead to success in home 
office administration, for scientific training, as well as all higher 
education, distinctly qualifies a man for administrative re- 
sponsibility." 

Insurance is today the foremost social institution of civi- 
lized countries. The business has assumed enormous propor- 
tions, and the tendency of the "insurance idea" is toward an 

45 



LIFE INSURANCE AS A SCIENCE 

ever-increasing area of general usefulness. To both the indi- 
vidual and the state, insurance is today an indispensable method 
and means for the maintenance of our standard of social security 
and progress. In the struggle of the masses for economic free- 
dom and a more equitable distribution of wealth, insurance 
aids and sustains all other forces making for this much-to-be- 
desired end. Insurance in its final analysis is simply a business 
method to make the world a better place to live in, than which 
no aim or purpose could be higher or more worthy. 

LIST OF REFERENCES. 

i . Report from the Select Committee on the Laws respecting Friendly 
Societies, ordered by the House of Commons to be printed, July 
5 th, 1825. p. 8. 

2. The Economic Theory of Risk and Insurance, by Allan H. Willett, 

New York, 1901. 

3. Principles of Political Economy, by William Roscher; translated by 

John J. Lalor, New York, 1878, 2nd Vol. (Book IV, Chap. III.) 

4. Jonathan Dymond's Essays on The Principles of Morality, New 

York, 1836. p. in and p. 117. 

5. Wayland, Essays on Moral Science, p. 248. 

6. Insurance: A Practical Exposition for the Student and Business 

Man, by T. E. Young, F. R. A. S., London, 1906. 

7. Investigations in the Military and Anthropological Statistics of 

American Soldiers, by B. A. Gould, New York, 1869. 

8. Medical Examination for Life Insurance, by Chas. Lyman Greene, 

Phila., 1900. p. 125. 

9. Medical Thermometry and Human Temperature, by T. Seguin, 

M. D., New York, 1876. 

10. The Chances of Death and other Studies, by Karl Pearson, F. R. S., 

Vol. I, p. 63. London, 1897. 

11. A View of the Rise and Progress of the Equitable Society, by Wm. 

Morgan, F. R. S. London, 1828. 

13. Address on the Increase of Cancer, by Dr. J. F. Payne; published 

in the Transactions of the Hunterian Society. London, 1899. 
1$. The Suicide Record of American Cities for 1906, by Frederick L. 
Hoffman. The Spectator, New York, 1910. 

14. Essay by John F. Dryden, on "The Inception and Early Problems 

of Industrial Insurance," The Insurance Monitor, 1903. 

15. Elements of Vital Statistics, by Arthur Newsholme, 3rd Edition 

London, 1899. 

46 



LIFE INSURANCE AS A SCIENCE 

1 6. An Address from the President and Directors of the Pennsylvania 

Company for Insurance on Lives and Granting Annuities to the 
Inhabitants of the U. S., upon the subject of the Beneficial 
Objects of that Institution; Phila., 1814. 

17. Proposals of the Pennsylvania Company for Insurance of Lives 

and Granting Annuities. Phila., 1837. 

18. Proposals of the Massachusetts Hospital Life Insurance Company, 

Boston, 1823. 

19. Prospectus of the Union Insurance Company, incorporated by the 

Legislature of the State of New York, for Making Insurances 
on Lives and Granting Annuities, New York, 181 8. 

20. An Act to Incorporate the New York Life Insurance and Trust 

Company, passed March 9th, 1830; including Proposal Forms, 
Premium Rates, etc. 
2i. Report of the Trustees of the New York Life Insurance and Trust 
Company, made to the Chancellor of the State of New York, 
March 29th, 1831. 

22. Answer and Report in the Matter of the New York Life Insurance 

and Trust Company in Chancery before the Chancellor, March, 
1834. 

23. Answer and Report in the Matter of the New York Life Insurance 

and Trust Company in Chancery before the Chancellor, March, 
1846. 

24. Address on Life Insurance in the United States, Hunt's Merchant 

Magazine, February and March, 1843. 

25. Practical Remarks on the Present State of Life Insurance in the 

United States, by Harvey G. Tuckett, Phila., 1850. 

26. Lectures on the Science of Life Insurance, by Moses L. Knapp, 

M. D., Phila., 1853. 

27. Life Insurance, its Nature, Origin and Progress, by Chas. B. Norton, 

New York, 1852. 

28. Baltimore Life Insurance Company, Proposals, Rates, etc., Balto., 

1836. 

29. Statistical Annals of the United States of America, by Adam Sey- 

bert, M. D., Phila., 1818. 

30. The Journal of Health, Vol. I, Phila., 1830. 

31. The Climate of the United States and its Endemic Influences, by 

Samuel Forry, M. D., 2nd Edition, New York, 1842. 

32. The Vital Statistics of Boston, by Lemuel Shattuck, Phila., 

1841. 

33. Statistical Report on the Sickness and Mortality of the Army of 

the United States, by Thomas Lawson, M. D., Washington, 1840. 

34. Census of Boston, 1845, by Lemuel Shattuck, Boston, 1846. 

47 



LIFE INSURANCE AS A SCIENCE 

35. Census of the City of Charleston, S. C, for the year 1848, by J. L. 

Dawson, M. D., and H. W. DeSassure, M. D. Charleston, S. C, 
1849. 

36. First Report of the Committee on Public Hygiene of the American 

Medical Association, Phila., 1849. 

37. Elements of Health, by E. J. Tilt, M. D., Phila., 1853. 

38. A Systematic Treatise on the Diseases of the Interior Valley of 

North America, by Daniel Drake, M. D., Vol. I, Cincinnati, 1850; 
Vol. II, Phila., 1854. 

39. Climatology of the United States, by Lorin Blodget, Phila., 1857. 

40. Report on the Vital Statistics of the United States, made for the 

Mutual Life Ins. Co. of New York, by James Wynne, M. D., New 
York, 1857. 

41. Human Health, by Robley Dunglison, M. D., Phila., 1844. 

42. The Wonders of Human Folly, in Chamber's Essays for the People, 

Vol. VIII, p. 63, London, 1854. 

43. Memoirs of Extraordinary Popular Delusions, by Charles Mackay, 

2 Vols., 3rd Edition, London, 1856. 

44. The Races of Man and Their Geographical Distribution, by Chas. 

Pickering, M. D., London, 1851. 

45. The Calculation of Probabilities, by M. A. Quetelet, English edition, 

London, 1849. 

46. An Essay on Probabilities and their Application to Life Contingen- 

cies, by Augustus De Morgan, London, 1838. 

47. Statistics, Medical and Anthropological, of the U. S. Army, by 

J. H. Baxter, M. D., 2nd Vol., Washington, 1875. 

48. The Geographical Distribution of Disease in Great Britain, by 

Alfred Haviland, London, 1892. 

49. The Geography of Disease, by Frank G. Clemow, M. D., Cam- 

bridge, England, 1903. 

50. New Travels in the U. S., as performed in 1788, by J. P. Brissot 

de Warville, New York, 1797. 

(Contains comparative tables of the probability of life in New 
England and Europe.) 

51. View of the United States, by William Darby, Phila., 1828. 

52. British Central Africa, by Sir Harry H. Johnston, K. C. B., New 

York, 1897. 

53. Annual Reports of the Bureau of Soils, Department of Agriculture, 

Washington, D. C, 1899-1907. 

54. Fatal Accidents in Coal Mining, Annual Review in the Engineering 

and Mining Journal, 1 900-1 910, by Frederick L. Hoffman. 

55. The Races of Europe, by Wm. Z. Ripley, Ph. D., New York, 1899. 

48 



LIFE INSURANCE AS A SCIENCE 

56. Climate and Health in Tropical Countries, by G. M. Giles, F. R. 

C. S., New York, 1905. 

57. Decennial Supplements to the Reports of the Registrar-General of 

England and Wales on Occupation Mortality, last issue pub- 
lished in 1908. (Parliamentary Report.) 

58. Outlines of Industrial Chemistry, by Frank Hall Thorp, Ph. D., 

New York, 1899. 

59. Handbook of Industrial Organic Chemistry, by Samuel P. Sadtler, 

Phila., 1908. 

60. Report of the Departmental Committee on the Use of Electricity 

in Mines, London, 1904. 

61. Drapers' Company Research Memoirs, Studies in National Deteriora- 

tion: (a) a first study of the statistics of Pulmonary Tubercu- 
losis, by Karl Pearson, London, 1907; (b) a second study of the 
statistics of Pulmonary Tuberculosis: Marital Infection, by the 
late Ernest G. Pope and others, London, 1908; (c) a third study 
of the statistics of Pulmonary Tuberculosis, the Mortality of the 
Tuberculous and Sanatorium Treatment, by Elderton and Perry, 
London, 1910; (d) On the Inheritance of the Diatheses of Phthisis 
and Insanity, by Charles Goring, M. D., London, 1909, all pub- 
lished by Dulau and Company, 37 Soho Square, W., London. 

62. Anthropometry and Physical Examinations, by J. W. Seaver, 

New Haven, Conn., 1896. 

63. A Manual of Physical Measurements, by Wm. W. Hastings, Spring- 

field, Mass., 1902. 

64. Ethnography of India, by H. H. Risley, Census of India, 1901, 

Calcutta, 1903. 

65. Report of the Royal Commission on the Decline of the Birth Rate 

of New South Wales, 2 vols., Sydney, N. S. W., 1904. 

66. On Stethometry, by Arthur Ran some, London, 1876. 

67. The Grammar of Science, by Karl Pearson, London, 1900. 

68. The Philosophical Works of Francis Bacon, London, T905, pp. 

409-412. 

69. Principles of Science, by Wm. Stanley Jevons, Vol. 2, London, 

1 87 1, Chap. XXX. 

70. The Nature of Man, by Elie Metchnikoff, New York, 1903. 

71. Natural Inheritance, by Francis Galton, London, 1889. 

72. Essays, Scientific, Political and Speculative, by Herbert Spencer, 

New York, 1896, Vol. 2, p. 74. 



49 



CHAPTER II 

INSURANCE ECONOMICS. 

The place of insurance in economics has never been clearly 
and finally determined by recognized authorities on the sub- 
ject. By far the most ambitious attempt in this field of research 
is the valuable monograph by Allan H. Willett, but this author 
considered the subject almost entirely from the theoretical 
point of view, with only slight regard to the actual practice 
of insurance in everyday life. The importance of insurance 
as an element of commerce and its far reaching influence on 
national and international commercial development would alone 
be sufficient to establish the necessity for a qualified inquiry 
to determine the place of insurance in economic science. The 
important relation, however, in which all forms of insurance 
stand to social progress at large requires that this branch of 
science should receive more attention from trained economists 
in the future than has been the case in the past. Evidently 
insurance is an important factor in production, for the cost 
of producing goods for sale must be materially diminished by 
insurance through the distribution of risks since the cost would 
necessarily be greater if the whole risk had to be assumed by the 
producer. It is equally evident that insurance is an important 
factor in distribution because the cost of transportation must be 
less where the risk of loss or destruction is distributed through 
insurance than where the whole risk has to be assumed by 
either the shipper or the agency engaged in transportation. It 
is very difficult indeed to conceive of commerce being carried 
on without insurance and the present high degree of security 
in practically all commercial transactions is, to a considerable 
extent, the result of the distribution of risks through insurance. 

So 



INSURANCE ECONOMICS 

Commercial credit itself is very largely based upon insurance, 
without which there would be no security for full or partial 
recovery in the event of total or partial loss through fire, ship- 
wreck, or other destructive agencies. Credit insurance as such 
has become an important branch of trade and the whole system 
of loans and advances on goods in storage, or in course of trans- 
portation, would be impossible were it not for the protection 
granted by policies of insurance. 

What is true of production and distribution is also true 
of consumption, and the final price of every article in com- 
merce is more or less governed by insurance even though the 
true incidence of the insurance premium in the price of a 
multitude of articles can not be traced with absolute certainty 
on account of the minute fraction of the cost involved. By 
aggregating insurance premiums, however, an enormous amount 
of extra commercial security is created which is nothing more 
nor less than the complete assumption of commercial risks in 
all its phases, and from every point of view, through the modern 
institution of insurance corporations. There is, thus, some 
evidence, at least available to prove that insurance is more or 
less a factor in the three main branches of economics — that is, 
production, distribution and consumption, but as yet no trained 
economist has concerned himself with the actual facts of insur- 
ance experience to trace this element with scientific accuracy 
through all the ramifications of economic science. 

It is, however, a distinctly helpful sign of an awakening 
economic interest in this important question that so high an 
authority on economic subjects as Mr. J. A. Hobson should 
have included insurance in a separate chapter in his recently 
published treatise on the Industrial System, being an inquiry 
into earned and unearned "TncomeX'from a modern point of 
view and with a due regard to modern conditions of life. Equally 
extended and qualified consideration has been given to insur- 
ance by Prof... Irving Fisher in his treatise, on The Nature of 
Capital and Income, published a few years previous to the 
work of Hobson, and both of these contributions may be said to 



INSURANCE ECONOMICS 

mark, in outline at least, the probable trend of future thought 
in formulating more definite conceptions of the place of insur- 
ance in economic science. 

Discussion of Insurance in the Wealth of Nations. 
From the time when Adam Smith published his Wealth 
of Nations, insurance has been referred to by economic writers 
and some of these references are of historic interest if not of 
particular value in present-day discussions of this important 
subject. At the outset of every discussion of insurance it is 
of importance to clearly realize the fundamental difference 
between insurance and gambling, a distinction which, unfor- 
tunately, is often lost sight of even by otherwise qualified 
writers on the subject. Gambling, as emphasized in the dis- 
cussion on lotteries by Adam Smith, is never a complete dis- 
tribution of risk, for as he observes, "There is not, however, a 
more certain proposition in mathematics, than that the more 
tickets you adventure upon, the more likely you are to be a 
loser," for, he continues, "Adventure upon all the tickets in 
the lottery, and you lose for certain; and the greater the number 
of your tickets, the nearer you approach to this certainty." 
This is the fundamental antithesis to insurance, which distri- 
butes an existing risk with a fair degree of approximation to 
the interests of each risk-taker, who in return for a small pre- 
mium secures complete or partial compensation for loss. Smith, 
in his discussion of wages and profits, remarks, "That the 
chance of loss is frequently undervalued, and scarce ever valued 
more than it is worth, we may learn from the very moderate 
profit of insurers." This sentence brings forcibly to our atten- 
tion the principle of adverse selection in insurance, whereby only 
those as a rule insure who feel that they have a substantial risk 
at stake. As in the words of Smith, "In order to make insur- 
ance, either from fire or sea-risk, a trade at all, the common 
premium must be sufficient to compensate the common losses, 
to pay the expense of management, and to afford such a profit 
as might have been drawn from an equal capital employed in 
5a 



INSURANCE ECONOMICS 

any common trade. The person who pays no more than this, 
evidently pays no more than the real value of the risk, or the 
lowest price at which he can reasonably expect to insure it." 
When this was written in 1776 the whole practice of insur- 
ance was necessarily very much more arbitrary, indefinite and 
uncertain than at the present time. 

During the intervening long period of years an immense 
amount of experience has been had and really conclusive statis- 
tical data have been secured which afford a better basis for 
the calculation of premium rates and a more certain profit to 
those who undertake the assumption of risk; but in the time 
of Adam Smith it could very properly be said that, "though 
many people have made a little money by insurance, very few 
have made a great fortune; and, from this consideration alone, 
it seems evident enough that the ordinary balance of profit 
and loss is not more advantageous in this than in other common 
trades, by which so many people make fortunes." Smith was 
entirely correct in placing insurance, at least at this period of 
time, on a perfect equality with other commercial undertakings 
for gain, and this position insurance has practically retained in 
all the commercial codes of European nations of ancient and 
modern times. As emphasizing the strictly commercial aspects 
of insurance as a trade, Smith observed that, "Moderate, how- 
ever, as the premium of insurance commonly is, many people 
despise the risk too much to care to pay it. Taking the whole 
kingdom at an average, nineteen houses in twenty, or rather, 
perhaps, ninety-nine in a hundred, are not insured from fire. 
Sea-risk is more alarming to the greater part of people; and the 
proportion of ships insured to those not insured is much greater. 
Many sail, however, at all seasons, and even in time of war, 
without any insurance." 

The Problem of Self-Insurance. 
Smith then considered the question of self -insurance, which 
of course is possible in the case of very large commercial 
undertakings, where the operations are on a sufficient scale 

53 



INSURANCE ECONOMICS 

to become subject to a law of average or the law of large 
numbers. The conclusion advanced by Smith is favorable to the 
self-assumption of risk, if such it may properly be called, and 
in his own words, "When a great company, or even a great 
merchant, has twenty or thirty ships at sea, they may, as it 
were, insure one another. The premium saved up on them all 
may more than compensate such losses as they are likely to 
meet with in the common course of chances. The neglect of 
insurance upon shipping, however, in the same manner as upon 
houses, is, in most cases, the effect of no such nice calculation, 
but of mere thoughtless rashness, and presumptuous contempt 
of the risk." (Wealth of Nations, Book I, Ch. X.) 

To the average man of business it must necessarily be next 
to impossible to arrive at more than an approximate esti- 
mate of the risk which he incurs without insurance. He is 
necessarily guided by past experience and personal observation 
of the disastrous consequences resulting from contempt of 
risk and indifference to insurance protection. With increasing 
average intelligence such a common contempt of commercial 
risk necessarily tends to disappear, and today the insurance 
of goods in commerce is practically universal and a duty 
imposed upon merchants and traders by the customs and 
laws of trade. 

Insurance as a Branch of Commercial Enterprise. 

Considering insurance by itself as a commercial institution 
and on an equality with commercial enterprises generally, it is 
suggestive to find in the Wealth of Nations a brief consider- 
ation of this point of view. Adam Smith, in discussing the 
rise and fall of commercial enterprises, which had or had 
not exclusive privileges in the nature of a monopoly osten- 
sibly for the purpose of extending to them an extraordinary 
degree of security, remarks that, "The only trades which it 
seems possible for a joint-stock company to carry on success- 
fully, without an exclusive privilege, are those, of which all 

54 



INSURANCE ECONOMICS 

the operations are capable of being reduced to what is called 
a routine, or to such a uniformity of method as admits of 
little or no variation. Of this kind is, first, the banking 
trade; secondly, the trade of insurance from fire and from 
sea-risk, and capture in time of war; thirdly, the trade of 
making and maintaining a navigable cut or canal; and, fourthly, 
the - similar trade of bringing water for the supply of a great 
city/' It does not fall within the present discussion to ex- 
amine into the soundness of this theory, for manifestly 
most other commercial enterprises carried on in the form of 
partnerships can safely be so carried on without the right or 
privilege of monopoly. The chief importance of the sentence 
is the sense in which the term "trade of insurance" is used in 
identically the same manner as the trade of banking, with the 
functions and purposes of which insurance has naturally much 
in common. Smith remarks, however, with reference to insur- 
ance undertakings, that, "The value of the risk, either from 
fire, or from loss by sea, or by capture, though it can not, per- 
haps, be calculated very exactly, admits, however, of such a 
gross estimation, as renders it, in some degree, reducible to 
strict rule and method. The trade of insurance, therefore, may 
be carried on successfully by a joint-stock company, without 
any exclusive privilege." The advantages of insurance to society 
and government are summarized by Adam Smith in the follow- 
ing suggestive sentence: "The trade of insurance gives great 
security to the fortunes of private people, and, by dividing 
among a great many that loss which would ruin an individual, 
makes it fall light and easy upon the whole society. In order 
to give this security, however, it is necessary that the insurers 
should have a large capital. Before the establishment of the 
two joint-stock companies for insurance in London (the London 
Assurance and the Royal Exchange Assurance), a list, it is 
said, was laid before the attorney-general, of 150 private insur- 
ers, who had failed in the course of a few years." (Smith's 
Wealth of Nations, Book V, Ch. I.) 

55 



insurance economics 

The Early Practice of Individual Underwriting. 

The last reference is to the practice of individual under- 
writing, which has never gained a strong foothold in this country. 
It was only in use to a limited extent during the colonial period. 
It is true, however, that through the gradual perfection of 
Lloyds a unique method of individual underwriting has been 
established in England, which for all practical purposes is prob- 
ably as sound and secure as corporate underwriting, but the 
practice of Lloyds is limited largely to marine insurance, which 
in its nature differs quite essentially from insurance against fire 
and the contingencies of human life. The assumption of excep- 
tional risks which are more or less in the nature of gambling 
ventures, by small groups of underwriters at Lloyds, does not 
fall within the corporate practice of Lloyds, but they are private 
undertakings in much the same manner as private deals may 
be conducted by members of an established stock exchange, 
including transactions which would not be recognized by the 
exchange itself. 

Discussion of Insurance by John Stuart Mill. 
From Adam Smith (1776) to John Stuart Mill (1848) 
insurance is only incidentally referred to by writers on political 
economy. The significance of insurance as an element of 
economics escaped the attention of writers who gave concern 
primarily to the purely technical aspects of economic science. 
Mill himself refers to insurance very briefly as one of the 
sources of profit, which he considers are resolved into interest, 
insurance, and wages of superintendence. It appears to have 
escaped the attention of Mill that interest itself is but a form 
of insurance, or at least that portion of the rate which exceeds 
the lowest return paid on government securities of unquestion- 
ably the highest intrinsic value. Interest, in a measure, is but 
another term for compensation for risk, while insurance is essen- 
tially the equivalent for risk assumption in merchant adventure 

56 



INSURANCE ECONOMICS 

or commercial and individual enterprises of all kinds. The 
remuneration of capital in different undertakings at a compara- 
tively high rate of interest is not essentially different in its nature 
from the assumption of risk in merchant adventure guaranteed 
against loss by policies of insurance. Mill observes that, " The 
profits, for example, of retail trade, in proportion to the capital 
employed, exceed those of wholesale dealers or manufacturers, 
for this reason among others, that there is less consideration 
attached to the employment. The greatest, however, of these 
differences, is that caused by difference of risk." He then 
continues, " The profits of a gunpowder manufacturer must 
be considerably greater than the average, to make up for the 
peculiar risks to which he and his property are constantly 
exposed. When, however, as in the case of marine adventure, 
the peculiar risks are capable of being, and commonly are, 
commuted for a fixed payment, the premium of insurance 
takes its regular place among the charges of production, and 
the compensation which the owner of the ship or cargo receives 
for that payment, does not appear in the estimate of his profits, 
but is included in the replacement of his capital." (Principles 
of Political Economy, 5th edition, vol. I, p. 500.) 

It is evident from the foregoing that if Mill had carried 
his argument further he could not have failed to come to the 
conclusion that insurance is an element of commerce or com- 
mercial enterprise, certainly to the extent that it materially 
affects the cost of production, which would unquestionably be 
greater in many branches of industry if the undertaking had to 
be carried on without the protection of a policy of insurance. 

Robert Ellis Thompson, who wrote a treatise on Political 
Economy, published in Philadelphia in 1875, and a revised 
edition in 1882, included insurance in a brief consideration of 
commercial credits, observing in part that where a seller has 
to grant credit he cannot afford to sell goods at as low a figure 
as if he were paid in cash, but that in fact prices vary according 
to the length of the credit, and that the difference in price is 
greater than the difference in the amount of loss resulting 

57 



INSURANCE ECONOMICS 

from the discount of commercial paper. He observes that 
the creditor "has to insure himself against bad debts by an 
increase of his profits on all transactions. He must charge 
more to good customers in order to insure himself against bad 
ones." This sentence would seem to sustain the theory of Mill 
that insurance is an element of profit and by inference an 
element in the cost of production. 

Viewpoint of a German Economist. 
The first extended consideration of the place of insurance 
in political economy was brought to the attention of English 
readers by the translation of Roscher's Principles of Political 
Economy, by Mr. John J. Lalor, published in 1878. The first 
German edition, however, had been published in 1854. Roscher 
included insurance in his consideration of the elements of con- 
sumption, dividing his subject into mutual and speculative insti- 
tutions, a brief discussion of the economic advantages of insur- 
ance, and the requisites of a good system of fire insurance. It 
requires no extended knowledge of the subject to make it clear 
that this discussion was entirely inadequate and that it proceeded 
from a superficial appreciation of the service rendered by insur- 
ance to every important branch of trade and industry as well 
as its relation to the social welfare of the peoples of civilized 
nations. Many of his observations, made at a period when 
insurance was practically in its beginnings, are no longer appli- 
cable to modern conditions, as among others, his statement 
that, "to the poorest class of those who need insurance, private 
insurance will perhaps be never properly accessible." More 
recent experience has successfully demonstrated that for 
certain important ends even the poor, by small deductions 
from their income, can provide by insurance for what custom 
has sanctioned as the most necessary expenses incident to 
burial and funeral observances. It is true that the progress of 
insurance has been less successful in the case of fire insurance, 
but even in this direction a substantial advance has been made 
and with the increasing security of dwellings against fire the 

58 



INSURANCE ECONOMICS 

absolute necessity for such protection perhaps no longer exists. 
Roscher, among other interesting observations, however, denned 
precisely the fundamental principle of all insurance in the words 
that, "the aggregate danger is less than the sum of indi- 
vidual dangers for the reason that it is more certain, and that the 
uncertainty, of itself, is an element of danger." While leaning 
strongly toward government insurance, at least in the case of 
fire institutions, he observes that, "the idea sometimes suggested 
in our day of making the system of insurance a government pre- 
rogative, arises as much from the passion for centralization as 
from socialistic tendencies." As partly in answer to this 
suggestion he quoted from Spittler's Politics the objection to 
insurance "that it diminishes benevolence and approximates to 
communism, thus hitting the dark side of all very high civili- 
zation." The German system of communal fire insurance always 
has been limited to houses, partly for the purpose of protecting 
the lender of money on mortgages against substantial loss. 
The function of government insurance has never extended to 
movable property — that is, furniture, etc. — and Roscher observes 
that, "the thought of making this species of insurance com- 
pulsory, or of turning it over to the State, has seldom been 
suggested." Aside from these considerations of insurance in 
its political and social, rather than in its strictly economic 
aspects, the observations of Roscher have no practical value 
to the students of economics at the present time. 

Insurance as a Factor in Distribution. 
Contrary to the theory of Mill, of including insurance and 
interest as elements of profit, Prof. Francis A. Walker con- 
sidered interest as an element of distribution, distinguishing 
precisely between true interest, or the lowest rate of return 
on money lent upon absolute security, and the higher rate of 
interest charged on account of extra risk incurred. In the 
words of Walker, "A great deal that is paid under the name of 
interest is not interest in the true sense, but is merely a pre- 
mium for the insurance of the principal sum lent. Real interest 

59 



INSURANCE ECONOMICS 

only comprises that part of the payment made which would 
be paid, were the return of the principal, at the date of the 
maturity of the obligation, a matter of reasonable certainty. 
Absolute assurance can be reached in no human transaction; 
but where the risk is so small that it amounts to nothing in the 
mind of the lender, as in the case of British consols, or of a 
"bottom mortgage," where the sum lent is only a half or a 
third of the value of improved real estate, we have an instance 
of real interest, pure and simple." In continuation, however, 
he observes that, M Whatever, in the same market, at the same 
time, is paid above this, for the use of capital, is of the 
nature of insurance against the risk of losing the amount lent." 
And he observes further, with particular reference to extra- 
hazardous risks and losses in speculative undertakings, in 
which more than double the normal rate of interest is usually 
paid, that " With investments or temporary loans inside this 
limit, a different rule obtains. The rates of interest paid are 
still graded with little real appreciation of the degrees of risk 
taken; the sums obtained as insurance cannot be assumed 
to be proportioned to the hazard; yet it is generally possible 
for an investor or lender to say, this is more safe than that: 
the adverse chances here are few and small ; are many and great 
there." Walker illustrates this principle by a concrete exam- 
ple of an investment by the same person on the same day, who 
purchases government bonds paying four per cent., railway 
shares paying six per cent., and loans on personal security 
a like amount, paying ten per cent. He remarks that the three 
portions of capital lent or invested exhibited no economic 
differences, and that the phenomenon noted — that is, the differ- 
ential rate of interest paid — is due in part to the insurance of 
the principal sum lent. Of course, insurance in this sense is 
widely different from insurance in actual commercial practice, 
but in essence the function is the same in that the risk is dis- 
tributed approximately in proportion to the degree of hazard 
incurred. By such distribution the hazard itself is partly 
eliminated and mercantile adventure is made possible; or, in 
60 



INSURANCE ECONOMICS 

other words, risk assumption is made comparatively safe in the 
equalization of losses which are likely to occur with a reason- 
able degree of certainty in conformity to the past experience 
of mankind. 

Insurance in Social Economics. 

In social economics insurance pre-eminently signifies finan- 
cial security of the family or other social relations. From 
the strictly utilitarian point of view insurance is a decidedly 
effective aid in the promotion of general happiness. Writers 
of the utilitarian school appear to have generally neglected 
insurance as a factor demanding serious consideration, and the 
theory of human happiness conditioned on the gratification 
of human wants and desires is practically independent of insur- 
ance as contributing toward this end. One of the few modern 
writers on utilitarianism, Mr. Michael Macmillan, has, however, 
given a brief consideration to the subject in his treatise on 
" The Promotion of General Happiness," observing that, "what 
remains to be done is to encourage the practice of insurance 
in its more readily recognized forms. Either the Nation as a 
whole, or individuals, must be taught to provide funds of 
savings for their support in times of scarcity." Life insurance, 
by its very nature enforces abstinence by the periodical pay- 
ments required to be made, and provides more effectively than 
any other method of savings or investment for periods of want, 
scarcity and distress. The view held by Macmillan with refer- 
ence to the utilitarian function of life insurance is of particular 
interest and in part explained as follows: 

"Vegetarians and total abstainers may also be defended 
against the effect of misfortune by life assurance — an arrange- 
ment by which wives and children are defended against desti- 
tution, in the case of the early death of a husband and father, 
and by which people generally can protect themselves and 
their families, to a certain extent, against heavy loss from illness 
and accidents. It may be described in sporting phrase as a 
kind of hedging against extreme misfortune by an agreement 
between a certain number of persons, namely, those who take 
policies in the same office, that those who are fortunate shall 

61 



INSURANCE ECONOMICS 

give support to those who are unfortunate. This insurance 
tends to equalize the lot of all insurers. Those who die young, 
or incur the particular misfortunes insured against, gain by- 
insurance , while those who live long, and do not suffer from the 
illness or accidents, or other misfortune, against which they 
insured themselves, are pecuniarily losers; for, if they had 
invested their money in other investments, they would probably 
have been richer. This system has, without doubt, when 
applied in its natural and most common way, considerably 
alleviated the misery of mankind." 

The Equalization and Distribution of Wealth bv 
Insurance. 

Insurance makes peculiarly for equality in the distribution 
of wealth, and to this extent as much as, if not more than, any 
other element of social and economic progress, makes for the 
promotion of happiness. Macmillan remarks with reference to 
this particular point that: 

11 The difference between the misery of uninsured orphans, 
widows, and men incapacitated for work, or attacked by sudden 
misfortune, and the less misery which they would suffer if pro- 
tected by insurance, is greater than the loss of happiness owing 
to waste of wealth incurred by those who have insured against 
misfortune, and been long-lived and fortunate. Further, there 
must be taken into account the peace of mind of the man who 
has been prudent enough to insure himself against misfortune, 
as compared with the anxiety about the future in the heart 
of the man who has not insured himself, and those dearest 
to him, against sudden and overwhelming calamity. Thus, 
there are two great advantages secured by insurance. On the 
other side, it may be said, that insured persons will be less 
careful to avoid danger. This is true, but only to a very 
limited extent, and, in some occupations, it is a duty to face 
danger boldly, so that, in some cases, insurance helps men to 
do their duty well." 

Social Progress and General Happiness. 

The risk to life and health involved in certain occupations 

can, without difficulty, be conceived as a detriment to social 

and economic progress unless balanced by insurance protection 

62 



INSURANCE ECONOMICS 

against extraordinary losses. Human life has a well-defined 
financial value, the equivalent of which is measured by the rate 
of insurance, which varies according to the risk incurred in the 
pursuit of dangerous trades. Many such trades would not be as 
readily followed were it not for the insurance protection secured 
in return for the payment of a slight additional premium. 
Many commercial risks would in a similar manner be avoided 
were it not for the security against exceptional losses secured by 
insurance. It is not difficult, of course, to conceive of disad- 
vantages resulting from insurance, and among other plausible 
arguments against life insurance in particular, Macmillan 
mentions the encouragement of marriage and the resulting 
increase in over-population. He remarks with reference to 
this point, that: 

" There is indeed, no doubt that young men, who would 
otherwise have remained single, are enabled to marry by the 
possibility of insuring their lives and so defending their families 
against destitution in the event of their early death. But this 
is no evil, but rather a defence against a great danger. The 
reckless marriages of the improvident have long threatened 
to drive prudence out of the world by causing a large portion 
of each new generation to be children inheriting improvidence 
from improvident parents. Whatever encourages the prudent 
to marry must surely have a beneficial effect on the future 
of the human race. So, after considering possible objections, 
we may come to the conclusion, that the institution of insur- 
ance has promoted the happiness of the world, and that the 
practice should be encouraged by utilitarians, especially among 
nations of vegetarians and total abstainers." 

While the foregoing remarks apply to sociology, rather than 
to economics, they are a significant addition to the very frag- 
mentary consideration which insurance has received from 
qualified writers on the subject of social economics. They con- 
firm the consensus of opinion of the people of civilized nations, 
that without insurance the social and economic progress of 
the time could not have been achieved, and that the security 
resulting from the practice of insurance in every branch of 
trade as well as in the more delicate affairs of domestic life, 

63 



INSURANCE ECONOMICS 

is equivalent to the attainment of a distinct and most effective 
form of practical humanitarianism. 

Insurance as a Factor in Business. 
The economic aspects of insurance as a factor in modern 
business enterprise, or the relation in which insurance against 
the risks of a business stands to the supply price of any par- 
ticular commodity produced, were first considered by Marshall 
in his, "Principles of Economics," the first edition of which was 
published in 1890, written with a limited knowledge of the 
almost infinite possibilities of utilizing the principle of insurance 
in the numerous and widely varying conditions of business, 
Marshall held the opinion that insurance could not be effected 
at moderate rates against all business risks, observing that: 

11 The manufacturer and the trader commonly insure against 
injury by fire and loss at sea ; and the premiums which they pay 
are among the general expenses, a share of which has to be 
added to the prime cost in order to determine the total cost of 
their goods. But no insurance can be effected against the great 
majority of business risks." 

There can be no question of doubt that many of the minor 
risks of business can be conveniently covered by insurance, 
but the modern development of many branches of insurance 
entirely unknown in the past, proves the possibilities of further 
specialization, which may enable the merchant to insure against 
losses which are now unprovided for. Marshall remarks, with 
reference to this point: 

11 Even as regards losses by fire and sea, insurance com- 
panies have to allow for possible carelessness and fraud; and 
must therefore, independently of all allowances for their own 
expenses and profits, charge premiums considerably higher 
than the true equivalent of the risks run by the buildings or the 
ships of those who manage their affairs well. The injury done 
by fire or sea, however, is likely, if it occurs at all, to be so very 
great that it is generally worth while to pay this extra charge; 
partly for special trade reasons, but chiefly because the total 
utility of wealth increases less than in proportion to its amount. 
But the greater part of business risks are so inseparably con- 

64 



INSURANCE ECONOMICS 

nected with the general management of the business that an 
insurance company which undertook them would really make 
itself responsible for the business; and in consequence every 
firm has to act as its own insurance office with regard to them. 
The charges to which it is put under this head are part of its 
general expenses, and a share of them has to be added to the 
prime cost of each of its products." 

Loss Prevention and Insurance. 
Many of the risks of business which Marshall must have h ad 
in mind when writing the preceding paragraph are not convert- 
ible into exact monetary equivalents, resulting, as he points out, 
from mismanagement, for which, of course, an insurance 
company can probably never assume entire responsibility. Nor 
would it be advisable that it should do so since such insurance 
might put a premium upon incapacity and negligence, which 
under given conditions might be decidedly detrimental to the 
general welfare and contrary to public policy. It is equally 
difficult to differentiate a theory of pure insurance against loss 
or uncertainty from insurance devices which really provide 
effective safeguards or preventive measures tending, more or 
less successfully, to the entire elimination of loss. This is par- 
ticularly well illustrated in the case of steam boiler insurance, 
where most of the premium income is expended not in the pay- 
ment of losses, but in expenditures for effective inspections. A 
similar result has followed the well known system of mutual fire 
insurance of Massachusetts cotton mills, which secure insurance 
protection at less than the ordinary rates on condition that proper 
sprinkling and other devices are employed, together with con- 
formity to advanced methods of building construction. It is 
an open question, however, whether it is correct to consider the 
cost of such preventive devices as an insurance premium in the 
sense that it is a contribution toward the equalization of losses. 

Economics of Self-Insurance. 

Equally difficult of exact definition is the economic func- 
tion of self-insurance — that is, where the risk of property 

65 



INSURANCE ECONOMICS 

destruction is assumed by large owners or combinations of 
capital with a sufficiently large exposure of risk to secure prac- 
tically the same results as would be experienced in the case of 
a small insurance company. Marshall refers to cases of this 
kind as follows: 

" In some cases insurance against risk is apt to be left out 
of account, altogether, in others it is apt to be counted twice 
over. Thus a large shipowner sometimes declines to insure his 
ships with the underwriters; and sets aside part at least of the 
premiums that he might have paid to them, to build up an 
insurance fund of his own. But he must still, when calculating 
the total cost of working a ship, add to its prime cost a charge 
on account of insurance. And he must do the same thing, in 
some form or other, with regard to those risks against which 
he could not buy an insurance policy on reasonable terms even 
if he wanted to. At times, for instance, some of his ships will 
be idle in port, or will earn only nominal freights; and to make 
his business remunerative in the long run he must, in some form 
or other, charge his successful voyages with an insurance pre- 
mium to make up for his losses on those which are unsuccessful." 

Insurance Expense in Business Accounts. 
In all such problems as these the insurance function is 
apt to be more or less obscure, and its proper apportionment 
as a contribution to risk assumption or loss equalization is 
very difficult. Marshall cautions against overlooking certain 
insurance expenses of this kind, more or less properly so de- 
fined and he warns against others being considered twice in 
mercantile accounting, observing that: 

11 In general, however, he does this, not making a formal 
entry in his accounts under a separate head, but by the simple 
plan of taking the average of successful and unsuccessful voyages 
together; and when that has once been done, insurance against 
these risks cannot be entered as a separate item in cost of pro- 
duction, without counting the same thing twice over. Having 
decided to run these risks himself, he is likely to spend a little 
more than the average of his competitors, in providing against 
their occurrence ; and this extra expense enters in the ordinary 
way into his balance-sheet. It is really an insurance premium 

66 



INSURANCE ECONOMICS 

in another form; and therefore he must not count insurance 
against this part of the risk separately, for then he would be 
counting it twice over." 

The involved nature of calculations of this kind is best 
made evident by concrete illustrations derived from actual 
experience. In all such cases the insurance premium is always 
an element of ultimate cost to the consumer, although it serves 
the useful function of reducing cost by a clearly traceable 
reduction in risk, which would otherwise constitute a hazard 
requiring to be made good by an increase in price. Proper 
safety precautions, particularly effective methods of fire pre- 
vention, will, other things equal, result in a lower rate of insur- 
ance and to this extent lower the ultimate price of goods to the 
consumer; or to the extent of the saving effected increase the 
profits of the manufacturer or merchant. As illustrated by 
Marshall : 

" When a manufacturer has taken the average of his sales 
of dress materials over a long time, and bases his future action 
on the results of his past experience, he has already allowed for 
the risk that the machinery will be depreciated by new inven- 
tions rendering it nearly obsolete, and for the risk that his 
goods will be depreciated by changes in fashion. If he were 
to allow separately for insurance against these risks, he would 
be counting the same thing twice over." 

Insurance as an Element in the Cost of Production. 
In economics insurance against risk may, in other words, 
be provided for by preventive measures, by increased caution, 
intelligence and experience, as well as by the direct payment 
of a premium to the insurance company assuming certain 
responsibility for certain well defined classes of risk. In all 
cases insurance is an element in the cost of production, and the 
cost must be diminished in proportion as uncertainty is reduced 
to a minimum. Trades which partake of the nature of adventure 
are more in need of insurance, particularly when the adventure 
is that of a sea voyage to distant ports, than normal commercial 
undertakings in the manufacture or sale of staple products, but 

67 



INSURANCE ECONOMICS 

in each case insurance in any one or more of its various forms 
will prove a decided advantage and tend to establish an equi- 
librium in trade relations. Commercial credit itself would be 
a totally different matter were it not for insurance covering 
the value of the goods against destruction by fire, the terrors 
of the sea or theft, etc., as the case may be. Commercial credit 
without insurance would result in decidedly higher rates of 
interest to be paid on commercial paper, and in exact pro- 
portion the ultimate cost of goods to the consumer would be 
increased. 

The Place of Insurance in Economic Theory. 
It must be evident from the foregoing that the theory of 
risk and insurance requires to be elaborated more fully by 
qualified minds before it can be applied in its entirety to the 
solution of social and economic problems. Political economy 
itself is as yet very far from having attained to the position of 
a science and most of its maxims and definitions are matters of 
doubt, speculation, and dispute. One of the most hopeful 
indications of gradual perfection in economic theory is the 
painstaking work of Mr. Henry Dunning Macleod, who for 
forty years has contributed a number of very important works 
on the theory of credit and the elements of economics, in which 
he has given some consideration to insurance. No writer has 
more precisely defined the almost neglected field of incorporeal 
property, or what for want of a better term is defined by him as 
negative economic quantities . His definition is illustrated by the 
explanation that "every sum of money is equivalent not only to 
a certain quantity of material commodities or labor, but also to 
the sum of the present values of an indefinite series of future 
payments, or to an Annuity." An annuity he defines as "the 
right to demand and receive a series of payments," and he 
remarks that "the lowest form of an annuity is the right to 
receive one future payment, such as a banknote or a bill of 
exchange." Conversely, "the highest form of an annuity is to 
receive a series of future payments for ever, such as an estate 
68 



INSURANCE ECONOMICS 

in land or the funds; an annuity to receive a series of pay- 
ments intermediate between these extreme terms is called a 
terminable annuity." Applying this theory to his definition 
of positive and negative signs to property, and of denoting 
"the right to property in things which have already come into 
possession as positive, and the right or property to things 
which will only come into possession at some future time as 
negative," he concludes that "many species of property are of 
a mixed nature; that is, the entire property in them consists 
partly of corporeal property and partly of incorporeal property." 
Holding that property in land is the highest of all forms 
of property, Macleod concludes that the purchase of an estate 
in land is simply the purchase of a perpetual annuity; and 
further, that every sum of money is not only equal in value to a 
certain quantity of material goods, or to a certain quantity of 
services, but also to a perpetual annuity, and that hence "an 
annuity, or the right to receive a series of future payments, 
is an economic quantity which may be bought and sold or 
exchanged, or whose value may be measured in money like any 
material chattel." It is difficult to give any clearness to this 
rather involved doctrine separate from the extensive discussion of 
the fundamental precepts and axioms which underlie the whole 
economic theory of Macleod; but the conclusions are of 
much practical significance when applied particularly to 
the legal doctrine that insurance is not an element of com- 
merce, nor an instrumentality thereof. Upon the basis of 
Macleod's definition of an annuity he is justified in holding that 
such an annuity may be paid to secure a certain sum of money 
at a given time, or on a given contingency such as a life or fire 
insurance, and that the whole field of economics comprehends 
in its final analysis the three great departments of, first, material 
things; second, personal qualities both in the form of labor and 
credit; and third, annuities. Writers of the older school of 
economists have failed to realize the extreme significance of 
the last, although in the words of Macleod, it is indeed the 
most extensive branch of economics at the present day. 
69 4 



insurance economics 

Negative Economic Quantities. 
In other words, according to this writer, who more than 
any other has apparently given concern to the abstract theory 
of insurance and risk as elements of economics, "all annuities, 
or rights to receive a series of future payments, whether the 
right be to receive a single future payment, or a limited, or 
an infinite number of them, are negative economic quantities," 
and "these negative economic quantities comprehend all mercan- 
tile and banking credit, such as bank-notes, cheques, bills of 
exchange, and all instruments of credit; exchequer bills, navy 
bills, dividend warrants, etc.; the land, the funds, terminable 
annuities, shares in commercial companies, the good will of a 
basiness, a professional practice, copyrights, patents, tolls, 
ferries, market rights, advowsons, benefices, shootings, fish- 
eries, leaseholds, policies of insurance of different kinds, and 
many other valuable rights, amounting in value to scores of 
thousands of millions in this country, of which there is scarcely 
any notice in the common text -books on economics." He very 
truly observed that by introducing this class of incorporeal 
property he has doubled the field of economics, and in all prob- 
ability he has very much more than doubled it, considering the 
enormous extent to which commercial negotiable instruments of 
all kinds are utilized in the commercial activity of the present day. 

Insurance as an Economic Function in Modern Life. 
The science of economics in the larger sense comprehends 
more than a mere science of wealth or the three essential functions 
of production, distribution and consumption. Prof. Hadley in 
his treatise on Economics includes competition, speculation, 
investments of capital, combination of capital, money, credit, 
profits, co-operation, protective legislation, etc. All these are 
more or less affected by insurance, or they re-act, favorably 
or otherwise, upon the development and growth of insurance 
institutions. Hadley first considers insurance in an extended 
discussion of economic responsibility, with special reference to 
methods and means tending toward a deliberate reduction in 
70 



INSURANCE ECONOMICS 

the burdens of pauperism. Commenting upon the German 
compulsory insurance system, which had then but a little more 
than a decade of actual experience, Hadley remarks: 

" There are many reformers who are anxious that other 
countries should follow the example of Germany. But the 
experiment has not progressed far enough to pass judgment 
on its success. In many respects the gain to the public from 
a system of this kind is more apparent than real. The payments 
to the insurance funds must chiefly, if not wholly, come out 
of wages. Even though they be nominally levied on the employer, 
he is compelled by competition with other emplo}^ers who are 
not subject to this levy to reduce in corresponding degree the 
wages which he pays." 

Observations on Compulsory and Voluntary Insurance. 
Contrasting compulsory insurance with voluntary insurance, 
as particularly emphasized in the friendly societies of England, 
Hadley remarks that these are in their nature agencies for the 
promotion of voluntary saving as a means of mutual insurance. 
He therefore concludes that, " If the government uses com- 
pulsory saving as a means to the same end, it takes away the 
ground for the existence of these societies and substitutes a 
system which secures the same material results to the workman 
but fails to secure the same educational and moral ones. To 
those who regard these educational and moral results as a chief 
advantage in voluntary saving, the change to a compulsory 
system looks like a step backward." The foregoing emphasizes 
once more the social aspects of economic questions. Mere 
political expediency may, of course, give its hearty approval 
to governmental schemes aiming to secure at once by com- 
pulsion what the gradual evolution of social morality would 
bring about in due course of time. Hadley has admirably 
summed up the objections to compulsory thrift in any form in 
the following sentences, which afford a much more concise and 
better explanation than could any words of mine: 

11 Finally, there is a danger that the apparent advantages of 
an insurance system of this kind may blind public opinion to the 

7i 



INSURANCE ECONOMICS 

more real advantages of better forms of insurance. A certain 
section of the public is so dazzled by the prospect of pensions 
that it overlooks the true ground on which pensions are justified. 
It comes to regard the pension as an end in itself rather than as 
a means of relieving the general funds of the government of a 

burden There are certain things which society must do in 

justice to itself, which it cannot safely allow individuals to de- 
mand in justice to themselves. If you give every man a right 
to a pension when he is incapable of self-support, you tacitly 
approve his failure to provide for himself and his children. . . . We 
need measures which shall increase individual responsibility 
rather than diminish it; measures which shall give us more 
self-reliance and less reliance on society as a whole. We can- 
not afford to countenance a system of morals or law which 
justifies the individual in looking to the community rather 
than to himself for support in age or infirmity." 

Economic Aspects of Speculation. 
Aside from these considerations of insurance in its relation 
to economic responsibility, Hadley includes a brief reference 
to insurance in his discussion of the economic aspects of spec- 
ulation. Distinguishing clearly at the outset insurance from 
gambling, and holding that the motives and effects in the 
two are wholly different, he points out: 

' ' The man who wins in betting on horses secures an addition 
to his income which means increased luxury; the man who has 
insured a house that burns down prevents the distress to his 
family consequent upon the loss of a home. In like manner, 
the man who has insured his life makes small annual payments 
at a time when he can do so without encroaching on the comfort 
of his family; thereby assuring to that family, in the event 
of his death, a payment of money at a time when the loss of the 
earning power of its head might otherwise mean want and 
destitution. Insurance puts money where it is needed, instead 
of putting it where it is not needed; where it has the highest 
utility to the individual and to society, instead of the lowest; 
where the possibility of securing it, instead of being a means 
of demoralizing excitement, becomes a source of security and 
of industrial efficiency. Hence the insurance company in pro- 
tecting the individual insurer against losses to himself and his 
family from fire, accident, or death, is rendering a public 

12 



INSURANCE ECONOMICS 

service ; and the profits of such a company, unlike those of the 
bookmaker or the lottery, are honestly earned by an actual 
contribution to the public wealth." 

The economic function of insurance is admirably defined in 
the preceding quotation, emphasizing the high degree of utility 
inherent in the method as a device making for social and econ- 
omic security. As concrete illustrations, Hadley refers to 
manufacturers' mutual insurance companies, which by seeking 
to reduce losses by avoiding all preventable causes of fire, have 
succeeded to an astonishing degree, while associations for boiler 
inspections have been far more successful in the exercise of their 
vigilance than could possibly be expected from public officials. 

Insurance and Gambling Contrasted. 
More recent writers on economics have given equally ex- 
tended consideration to insurance, with special reference to its 
practical utility as an aid in the solution of economic questions. 
Prof. Frank A. Fetter, writing in 1904, contrasts insurance 
with gambling and speculative profits, calling particular atten- 
tion to the element of chance inherent in all individual enter- 
prise. He remarks: 

"A general average of chances in different lines of business 
causes some to be called safe, others extra-hazardous. The 
chance is averaged and added to the profit or gain of that in- 
dustry, for an extra-hazardous industry must in general afford 
a higher average of profit in order to induce men to engage in 
it. It is folly to take a risk without ascertaining its degree, 
so far as general experience enables one to choose. But inas- 
much and in as far as the gains and losses fall unequally upon 
different individuals, income depends on chance." (The Principles 
of Economics, p. 334) 

From this point of view he defines gambling as a transfer 
of wealth on the outcome of events absolutely unpredictable, 
which, of course, is the very antithesis to the practice of insur- 
ance. It is true, of course, that legitimate forms of chance in 
risk taking, according to Fetter, shade off into illegitimate 
forms of gambling, but it is an error to insist upon the gambling 
73 



INSURANCE ECONOMICS 

aspects of insurance undertakings, since the sole object of 
insurance is the equalizing and eliminating of the element of 
chance in human affairs. Fetter observes very properly with 
reference to this important point, after a brief consideration 
of the decidedly more hazardous form of insurance under- 
writing in the middle ages, that: 

" Gradually there came about a specialization of risk- 
taking by the men most able to bear it. They could tell by 
experience about what was the degree of uncertainty, and could 
lay their wagers accordingly. When several insurers were in 
the same business, competition forced them to insure the vessel 
and cargo of the ordinary trader for something near the per- 
centage of risk involved. The insurance thus tended to become 
a mutual protection to the ship-owners; what had to be paid 
in premiums to cover risk came to be counted as part of the cost 
of carrying on that business." 

To the foregoing he adds that modern insurance is mutual 
in nearly every case, and that the total premiums equal the 
total losses plus operating expenses, the interest on the reserve 
of premiums counting as part of the premium. He, therefore, 
concludes : 

" Each one gets protection for the loss of his property in 
return for the payment of a sum that will cover the losses on 
others' property. Such an exchange is a profitable one. The 
premium comes from marginal income; the loss of house or 
property would fall upon the parts of income having higher 
marginal utility. The less urgent wants of the present are 
sacrificed in order to protect the income that gratifies the more 
urgent wants of the future. In insurance each party gives a 
smaller utility for a greater ; each has a margin of advantage ; 
while the greater certainty in business stimulates effort and 
rewards it. This is quite the opposite of the working of betting 
and gambling." 

Relation of Insurance to Money, Credit, Trade 

and Transportation. 
In 1905, Prof. Edwin R. A. Seligman published a treatise 
on the " Principles of Economics," with special reference to 

74 



INSURANCE ECONOMICS 

American conditions, in which he defines among others the 
structure and process of economic life. In his consideration 
of value and exchange — that is, money, credit, international 
trade, and transportation — he properly includes insurance, 
with a brief discussion of its nature, growth, theory, and 
methods of public regulation. He defines insurance as a de- 
vice to remove the economic consequences of uncertainty, and 
remarks that, "the risk with which economic activity com- 
monly concerns itself is the degree of uncertainty rather than 
the degree of probability." He follows this definition with 
the conclusion that," The need of protection against risk grows, 
therefore, with the degree of uncertainty which in economic 
actions increases as probability increases." Uncertainty, he 
points out, is clearly a disadvantage, which every prudent 
man desires as far as possible to eliminate, and this can be 
accomplished in three ways — first, by avoidance; second, by 
prevention; and third, by assumption of risk. The entire risk, 
of course, may be assumed, but it is possible to reduce it by com- 
bining with others into a group and by distributing the losses 
to the group as a whole. In this way, according to Seligman, 
certainty is substituted for uncertainty, and this method of 
combination is called insurance. The essence of insurance, he 
explains, is the effort to diminish the risk of uncertainty, and 
considered from this point of view, " Insurance is productive, 
that is, it involves an increase of wealth, because it lessens 
the social costs of risks." He is careful to explain that we must 
not confuse the loss due to uncertainty with the loss due to 
the occurrence itself, for he remarks that: 

" The occurrence is bound to happen. Death will come, fire 
will consume, the tornado will strike. In some cases the prob- 
ability of the occurrence or the amount of the loss may indeed 
be somewhat lessened by preventive action. A good police force 
will diminish burglary, an efficient fire department and a good 
building code will decrease fire losses, carefully devised factory 
laws will lessen accidents. In all these cases, however, we have 
to deal with prevention, not with insurance. Insurance takes 
the fact itself for granted; it does nothing to eliminate the 

75 



INSURANCE ECONOMICS 

occurrence. The loss is hence the same, whether we have insur- 
ance or not ; the house is burned and there is less wealth than 
before." 

The Compensation Required for Risk. 

There is, of course, in all cases an additional loss due 
not to the occurrence itself, but to the uncertainty, and this, 
according to Seligman, can best be observed in the investment 
of capital. The ordinary man will not assume risk unless he 
is remunerated for it. When a capitalist loans funds and there 
is any special degree of risk connected with the transaction, 
it is a familiar fact that he will increase the rate of interest 
by a corresponding amount. This increase in the interest 
rate is an addition to the expenses of the borrower. To the 
extent, therefore, that insurance diminishes risk or uncertainty 
in commercial enterprise the ultimate cost of the product, 
or the price ultimately charged to the consumer, is corres- 
pondingly reduced, or in the words of Seligman, "if the uncer- 
tainty could be eliminated, the price of the commodity would 
be lower and there would be a corresponding gain to the com- 
munity as a whole." Since insurance performs this function 
by minimizing uncertainty, it is accordingly a factor in the 
production of wealth. 

Factors in the Cost of Production. 

The practical importance of this consideration cannot 
easily be over-estimated. No writer previous to Seligman has 
so clearly defined the economic function of insurance as an 
element in the cost of production. In his own words, 

" Like transportation, insurance falls under the head of 
exchange of wealth, while exchange, as we know, is itself a 
species of production. Improved transportation reduces the cost 
of having a commodity in one place become a more valuable 
commodity in another place; improved insurance reduces the 
cost of having the uncertainty of the future change into the more 
valuable certainty of the present. Transportation overcomes 
the disadvantages of space ; insurance overcomes the disadvan- 

76 



INSURANCE ECONOMICS 

tages of time. Transportation is productive because it increases 
space utilities ; insurance is productive because it increases time 
utilities." 

In continuation, he answers the question as to how insurance 
minimizes uncertainty, in the statement that: 

" The answer is, through the combination of risks. This 
is a result of the law of probabilities. If we have accurate 
statistics of fires, for example, for a term of years and take the 
number of fires with a given number of houses during that 
period, we get an average. If the figures in any year correspond 
exactly to the average, there would be a certainty in the number 
of fires, and the only uncertainty would be as to which house 
would burn. In point of fact, however, in any particular year 
there will be a variation from the average. According to a 
well-established law, the probable variation increases only as 
the square root of the number of cases. If there are a hundred 
times as many houses, there will be only ten times as much 
probable variation from the average loss. Hence the larger 
the number of cases, the less will be the certainty as to the 
amount of loss which will be borne by the group as a whole. 
Insurance combines the risk into a group, and thus reduces the 
element of uncertainty. The risk of the group is less than the 
sum of the risks of the individuals who form the group." 

Fallacies of Self-Insurance. 
He also disposes of the alternative of so-called self-insurance 
by pointing out that only an immense corporation may practice 
self -insurance with a better chance of success than a corporation 
organized for that purpose. He concludes: 

" The great benefit of an insurance company is not only 
that the risks are combined, but also that they are transferred 
to a class who can afford to make a special study of the prob- 
lem, and who can thus reduce the cost of insurance by displaying 
their ability to estimate uncertainties. Whether the company 
is a stock corporation or a mutual company is of importance 
only as to the ultimate distribution of the profits of the enter- 
prise; in one case, as in the other, however, the management 
of the business is confided to a class of experts. The more 
adept the insurance companies, and the more scientific their 
methods, the closer will be the correspondence between the 

77 



INSURANCE ECONOMICS 

preparation for, and the fact of loss and the smaller will be 
the accumulation of the necessary insurance fund, the lower 
will be the insurance premium, and the greater will be the net 
gain to the community. Insurance properly conducted is the 
opposite of gambling. If any one takes out an insurance policy, 
he frees himself from an existing uncertainty and transfers the 
risk to some one who is more qualified and ready to assume it; 
if he makes a wager with another, the newly created uncer- 
tainty attaches to both. Insurance is the transfer and reduc- 
tion of risk; gambling is the creation and increase of risk." 

Excepting Mr. Allan H. Willett, whose dissertation on the 
theory of risk and insurance will be subsequently referred to, 
Seligman, more than any other recent writer, has measurably 
advanced the theoretical discussion of the subject. 

Relation op Insurance to Interest and Profit. 

Long previous to Seligman, Prof. Richard T. Ely had 
considered insurance as an element in social economics, but 
rather as a factor making for social efficiency and social progress 
than as a distinct element in economic theory. In his "Outlines 
of Economics," published in 1905, Ely, however, considers 
insurance in its relation to interest and profits, defining 
the elements of gross profits as replacement of capital, insur- 
ance, interest, wages of superintendence, and pure profit. The 
second element is necessarily the payment for risk incurred 
in commercial enterprise. Insurance as thus defined may not 
necessarily be the payment of an insurance premium to an 
insurance corporation, but merely the higher rate of interest 
paid for capital borrowed to carry on a particularly hazardous 
undertaking. Ely also considers insurance with reference to 
consumption and saving. Probably no other function in modern 
society serves so distinctively the purpose of increasing capital 
as insurance, which requires the accumulation of enormous 
sums as security, with the condition that such sums must 
be safely invested and yield a proper rate of interest. In life 
insurance the inducement to save periodically or systematically 
sums, however small, which would otherwise be wasted, or 
78 



INSURANCE ECONOMICS 

which in any event would not be converted into capital, con- 
tributes as much, if not more than any other method of savings 
or investment to the increase in the national wealth. Ely refers 
to this relatively modern institution as one of the most valu- 
able factors in our economic civilization, and remarks: 

" It has the great merit of providing in varying proportions 
for both security and profit of investment. The provision for 
security is especially prominent in the case of fire insurance 
It is often said that such an insurance is simply an equalization 
of losses, or a distribution of a heavy sudden loss over a long 
period of time. In fact, it is much more than that. It is im- 
portant to take the amount of loss from a business in such 
amounts and at such times that no vital want is left unsatisfied, 
and this is done by insurance. Thus perpetuity and equality 
of conditions is guaranteed to a business in such a way as to 
greatly encourage investment. The same principle applies to 
life insurance. The death of a business man is often a more 
serious shock to a business than a conflagration. The payment 
of a life insurance policy is often a very great relief to the financial 
embarrassments in which such a business is left." 

While this discussion is more with reference to the social 
aspects of insurance, it also has a decided practical bearing 
upon the discussion of insurance as an element of economics. 
Economics, as Ely observes, is, after all, a science of man. 
It is continuously a question of human wants and needs, and 
the means and methods most productive to bring about a 
satisfaction of human desires at lowest cost. Without entering 
upon a discussion as to the distinction which requires to be 
made in economics between value and utility, it is self-evident 
that insurance is of the highest utility, because it satisfies to 
so large a degree, and in so effective a manner, the human 
wants and needs, by eliminating the inherent insecurity in 
business enterprise as well as in the duration of human life. 

The Accumulation and Conservation of Capital. 
The full significance of the economic function of insurance 
becomes apparent only when it is considered how enormously 
insurance aids in the accumulation of capital. Not only does 

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INSURANCE ECONOMICS 

insurance aid in the accumulation of capital by the aggregation 
of the vast funds which constitute the security of the insured, 
but it aids further in the conservation of capital by the en- 
couragement which it gives, and compulsion, so to speak, 
which it exercises in systematizing the thrift function of the 
people. The assets of American life insurance companies alone 
in 1909 amounted to $3,643,858,000, consisting chiefly of 
$2,700,190,000 invested in the bonds of transportation 
companies and in real estate mortgages; and $312,273,000 
invested in other securities of this kind. A theoretical 
consideration of the whole question of the nature and function 
of capital and income would be required precisely to indicate 
the function which insurance performs in modern public and 
private finance. One of the most valuable contributions to 
this discussion is the treatise by Prof. Irving Fisher, on the 
Nature of Capital and Income, published in 1906, which 
properly includes a discussion of insurance in its relation to 
the question of risk and its assumption in the investments of 
capitalists. In the words of Fisher: 

" Business men try not only to estimate the risks which 
they must encounter and to adjust their accounts accordingly, 
but they also endeaver to avoid such risks altogether. This 
follows from the existence of the factor of caution. Where the 
coefficient of caution is abnormal, amounting to incaution, 
risks are not avoided, but are expressly sought, and the phe- 
nomena of gambling and indiscriminate speculation are the 
result. But in the great majority of men there exists a healthy 
fear of risks, and in consequence a tendency to avoid or reduce 
them." 

The Reduction of Risk by Insurance. 

Fisher explains that there are five principal ways in which 
risk may be reduced, that is: (1) By increasing guaranties for 
the performance of contracts; (2) by increasing safeguards 
against incurring losses; (3) by increasing foresight and thereby 
diminishing the risks; (4) by insurance, that is, by consolidating 
risks; and (5) by throwing risks into the hands of a special 
class of speculators. 

80 



INSURANCE ECONOMICS 

Considering the means of avoiding and shifting risks by 
insurance, Fisher remarks: 

" Insurance involves the offsetting of one risk by another; 
that is, the consolidation of a large number of chances whereby 
relative certainty is, as it were, manufactured out of uncer- 
tainty. To illustrate this, let us suppose that 10,000 houses 
of the same kind are too distant from each other to be destroyed 
by the same fire, and let us suppose that these houses in the 
average would be worth $10,000 each were it not for the risk 
of fire; in other words, that $10,000 is the capitalized value of 
the services to be rendered by each house, assuming that it 
lives out its natural life. The value of the total number of 
houses would then be $100,000,000. This is the "riskless value." 
It is the capitalized value of the income which the 10,000 houses 
would bring in, were there no loss by fire. If interest is at 5 per 
cent., the income which is thus capitalized is $5,000,000 a year. 
If now we suppose that the annual risk of fire is one chance in 
200, there will be about 50 houses annually burned. Reckoning 
the value thus destroyed at an average of $10,000 for each 
house, there will be $500,000 annually lost by fire. We must 
now deduct this from the $5,000,000, which would be the income 
were it not for fires. We have left $4,500,000, the capitalization 
of which is only $90,000,000. In other words, the total property 
of 10,000 houses is worth in "mathematical value" $90,000,000 
instead of $100,000,000, the reduction being because of the 
prospect of fires. If we suppose all of these houses to be owned 
by one corporation, this mathematical value of $90,000,000 
might also be the actual value, for such a corporation could 
count on about 50 houses burning annually almost as a certainty. 
Each house would then be worth, on an average, $9,000. But 
if such an individual house is owned by an individual person, 
this mathematical value would not be its "commercial value," 
on account of the element of caution. Let us say that the 
caution coefficient is 7-9, in which case the house would be 
worth $7,000. In other words, we have $10,000 as the "risk- 
less" value of the house, $9,000 as its "mathematical " value, 
and $7,000 as its actual "commercial " value, assuming that 
there is not as yet insurance. Now if the owner of such a house 
could secure insurance on a purely mathematical basis of the 
risk, which, as we have seen, is one-half of one per cent., and, 
therefore, could pay only $50 per annum, in consideration of 
which the value of his house, if destroyed by fire, is restored 

81 



INSURANCE ECONOMICS 

to him, it is evident that he has made a good investment; for 
he is now assured of a house even should a fire occur, and he has, 
instead of the risk of fire, merely to pay his annual premium of 
$50 a year, the capitalized value of which is $1,000. Conse- 
quently, his house is worth $10,000 — $1,000, or $9,000. 

"Such an insurance rate, however, being based on the 
mathematical or "pure" premiums, would not pay any profit 
to the companies conducting it. But even a higher insurance 
would leave a large margin of capital-value saved to the insured. 
If we suppose a "loading," so that the insurance premium is 
not $50, but $100, similar reasoning would show that the value 
of the house when insured would be to the owner $8,000 instead 
of $7,000. As long as the loading is not sufficient to absorb all 
the margin between the $7,000 and $9,000, it will be advan- 
tageous to insure." 

The Protection of Income by Insurance. 
Prof. Fisher emphasizes the advantages of insurance, with 
particular reference to conserving and equalizing the income 
from property, and he illustrates his views by the statement 
that: 

" The owner of the house in question would receive, if it 
were not insured, a net annual income, after providing for 
depreciation, of five per cent, on $10,000, or $500 a year until 
the house was burned, after which he would receive nothing; 
whereas, if he insures, he receives this $500 income less his 
premium up to the date of the fire, and afterward the income, 
from the indemnity paid him by the company." 

What is true of fire insurance is equally true of other forms 
of insurance, and Fisher observes, with particular reference 
to life insurance, that, like the other forms, it tends to steady 
the income of the beneficiary. He states: 

" If a wife holds insurance on her husband's life, the con- 
sequence is that, although what he gives her during his life is 
somewhat diminished, her income will not suddenly cease at 
his death. The tendency of insurance here as elsewhere is to 
make regularity out of irregularity, relative certainty out of 
relative uncertainty; and where, under the form of insurance 
contracts, the opposite result follows, the case is not one of 
true insurance, but tends to become one of gambling." 

82 



INSURANCE ECONOMICS 

It is hardly necessary to point out that the distinction 
between insurance and gambling has been made so clear by those 
who have written upon the subject that it requires no further 
analysis. It is manifestly to the interest of insurance com- 
panies to discourage every form of adverse selection, or in 
other words, attempts to gain in an illegitimate manner by a 
method designed solely for the equalization of normal losses. 
Any attempt to pervert insurance from its legitimate function, 
and to afford opportunities for speculation and fraud, would 
divert the system into one of gambling and make it more or less 
contrary to public policy. 

Considerations of Insurance Law. 
A very interesting contribution to the economic aspects 
of insurance is contained in a work entitled, "On the Civic 
Relations," by Henry Holt, published in 1907. Mr. Holt 
includes insurance in his discussion of the law of personal 
property contracts,* observing that: 

' ' Suretyship and warranty shade into another large class of 
contracts embracing all kinds of insurance. Fidelity insurance 
is especially like suretyship, but also fire, marine, accident, life, 
plate-glass and all the rest, are of course of the nature of 
warranty; but the warrant extends, unless otherwise agreed 
in the policy, not necessarily to the full amount of the policy, 
but only to the value of the property at the time of loss. Hence 
the desirability of keeping the policy small, or having it declare 
that the amount insured for shall, in case of loss, be taken as 
the value of the property. Life-insurance companies, however, 
are always liable for the full amount of their policies." 

The Place of Insurance in the Law Merchant. 

The law of insurance is very largely the law of contracts 

and from the earliest times it has been a part of the law 

merchant. The decision of the supreme court that insurance 

is not an element of commerce, is not sustained by the actual 

* For a full discussion of the law of insurance as within the scope 
of personal property contracts, see Kent's " Commentaries," Vol. III. 

83 



INSURANCE ECONOMICS 

facts of insurance history and the historical development of 
the insurance contract out of the earliest forms of bottomry 
loans. Distinguishing clearly between the principle of insurance, 
as such, and the application of the principle to actual 
practice, it requires no extended research into the history 
of commerce to prove that the development of the principle 
is practically coincident with the progress of navigation and 
national and international commercial intercourse. Distinguish- 
ing further between the earliest form of underwriting — that is, 
long before the business was conducted by corporations — 
insurance was in its origin as much a matter of business enter- 
prise as any other branch of trade. In fact, one of the earlier 
legal definitions of insurance emphasizes this point precisely 
when, for illustration, John Millar, in his "Elements of the 
Law Relating to Insurances," published in Edinburgh in 1787 
defines insurance *s "a contract by which one man, for a con- 
sideration received, becomes liable for the loss arising to another 
from any specified contingency." While this form of under- 
writing has never been very general in this country, it prevailed 
quite extensively previous to the second war with England, 
although by that time the business of the Insurance Company 
of North America, and other insurance corporations had 
attained to considerable proportions. 

The Place of Insurance in the Industrial System. 
It would manifestly unduly enlarge this discussion to con- 
sider all the numerous authorities on economics who have inci- 
dentally referred to the subject. The practice of insurance 
is so intimately interwoven with the whole fabric of modern 
business life, that Mr J. A. Hobson has very properly included 
insurance in his elaborate outline of the industrial system, 
with special reference to earned and unearned incomes. Accord- 
ing to Hobson, insurance produces four utilities: (1) reducing 
the pain or subjective injury of an accident, (2) producing a 
sense of security, (3) evoking productive energy, (4) preventing 
objective waste. He very properly observes that, " No de- 

84 



INSURANCE ECONOMICS 

scription of the outlines of modern industry would be complete 
without reference to the business of insurance, which is so 
intimately associated with finance." Of particular importance, 
however, is the part which insurance plays in the industrial 
system as an instrument for producing and distributing goods 
and services. In answer to the question as to what insurance 
produces, Hobson remarks that: 

" We can best formulate our answer by first putting another 
question, viz.. What damage would be done if there were no 
insurance ? The life of a producer often comes to a sudden end ; 
if no provision were made for securing to those dependent on 
him a continuance of at least a part of the income he earned 
when alive, they must sink suddenly into a lower standard of 
living, perhaps into penury, and both their happiness and their 
present or future efficiency as producers might be greatly im- 
paired. By paying a comparatively small sum over a long term 
of years, which involves the habitual deprivation of what, if 
expended otherwise, would constitute the least useful and pleas- 
urable part of his whole expenditure, he is enabled to avert 
a certain damage of a serious kind affecting the comforts, con- 
veniences, or even the necessaries in the standard of life of his 
family. What insurance here produces is evidently the differ- 
ence in disutility between the sum of the small losses involved 
in the payment of the yearly premiums and the great loss 
involved in the sudden total withdrawal of the whole or a large 
part of the family income. The substitution of the former small 
disutility or cost for the latter large one is in effect the pro- 
duction of so much utility, not merely from the standpoint 
of the individual but from that of the society to which he 
belongs. It causes, directly, no increase of concrete goods or 
services, but by assisting a more equitable distribution over 
time of the aggregate of such objective wealth, it causes more 
to be got out of it in satisfaction and in subjective utility 
In averting a damage to the productive power of industry by a 
sudden loss of family income insurance may also be considered 
as directly productive of industrial energy." 

The Protection of Property and Wealth by Insurance. 

In this important passage, in marked contrast to the often 

indefinite and inconclusive language of earlier writers on the 

85 



INSURANCE ECONOMICS 

subject, Hobson, better than any other writer, emphasizes 
the function of insurance in the industrial economy of 
modern nations, and in particular the service rendered by 
insurance in preventing losses from falling suddenly in full 
force on business undertakings by distributing such losses 
over a large number of owners and over a long period of 
time. He points out that the sudden total destruction of 
some important part of material capital may destroy the whole 
efficiency of what remains and suddenly terminate the value 
of any given business ability. By thus conserving commercial 
power insurance renders one of the most useful of services to 
the whole national economy. In the words of Hobson: 

" Without insurance the worry caused by conscious inability 
to provide against an increasing number of more highly-appre- 
ciated risks would become an almost intolerable strain, en- 
hancing the subjective or human cost of production throughout 
the business world. As the spread of education and the stir of 
modern city life cause larger and larger numbers of the workers 
to have more feeling for the future of themselves and their 
families, this extensive and intensive growth of anxiety is 
exhibited in an immense expansion of private and public insur- 
ance. The main direct object of such insurance is the produc- 
tion of a sense of security." 

In other words, according to the same writer, a reasonable 
measure of security is essential to evoke the best productive 
powers, for without such security man cannot, and will not, do 
his best. He therefore concludes that " The production of 
security is therefore a direct enhancement of productive energy," 
and this would be impossible without insurance. 

The Abstract Theory of Risk and Insurance. 
The foregoing considerations indicate in general outline 
the attention which leading writers on economics have given to 
the subject of insurance. It is made clear that as yet insurance 
has not received the full consideration, both theoretical and 
practical, of which it is deserving as an element of economics, 
commerce and social progress. The only qualified inquiry 
86 



INSURANCE ECONOMICS 



into the whole subject is a treatise by Mr. Allan H. Willett, 
on " The Economic Theory of Risk and Insurance," published 
in 1 90 1. This dissertation is by far the most ambitious attempt 
to co-ordinate the theory of risk and insurance in the light of 
economic teachings and with some regard to practical ex- 
perience. Insurance, according to Willett, is defined as a fund 
accumulated to meet uncertain losses, but more precisely, 

"as that social device for making accumulations to meet 
uncertain losses of capital which is carried out through the 
transfer of the risks of many individuals to one person or to 
a group of persons. Wherever there is accumulation for uncer- 
tain losses, or wherever there is a transfer of risk, there is one ele- 
ment of insurance ; only where these are joined with the combi- 
nation of risks in a group is the insurance complete." 

Aside from the advantage resulting from the combination 
of risks, and the consequent reduction of uncertainty, as decided 
economic benefits resulting from insurance, Willett observes that 
there is another advantage to commercial enterprise in that, 

"It is desirable for society that risks should be correctly 
estimated. Men differ much in their ability to judge them. 
The segregation of the work of estimating risks leads to a differ- 
entiation of capitalists, as a result of which those who are 
especially adapted to that task will be the ones who will under- 
take it. Moreover, their natural ability will be further devel- 
oped through the experience and training of the work itself. 
On the other hand, there are many men capable of rendering 
good service to society in comparatively safe industries, who 
are so constituted that the necessity of running any great 
chance of loss seriously diminishes their efficiency. The possi- 
bility of transferring the risks of their business to others for 
a fixed premium frees them from the paralyzing influence of 
uncertainty, and enables them to make the best use of their 
powers in other directions. The gain to society from the 
transfer of risks is obtained partly through the reduction in 
the cost of carrying the risks when they are borne by those 
who have the most ability to estimate them and the most 
confidence in their own judgments about them, and partly 
through the increase in the efficiency of those who are abnor- 
mally sensitive to the influence of uncertainty." 

87 



insurance economics 

The Economic Gain Resulting from Insurance. 
The economic significance of insurance as considered from 
this point of view can hardly be overestimated in the case of 
a progressive commercial nation, in which the assumption of 
widely varying risks, differing in nature and degree, is a first 
essential in business undertakings on a large scale. To the 
extent that insurance encourages risk assumption it aids 
materially in the economic progress of the nation. Willett 
points out: 

" How great the gain is, even under existing imperfect con- 
ditions, it is impossible to estimate, since it is difficult to con- 
ceive how the large enterprises of the present day could be 
carried on without the possibility of transferring to insurance 
companies many of the risks involved in them. It could cer- 
tainly be done only on a much larger margin of safety than is 
now considered necessary." 

Insurance as an Essential Factor in the Production 
of Wealth. 
In brief, according to Willett the treatment of insurance 
naturally belongs in the division of economic theory that deals 
with the phenomena of the production of wealth. This view 
is in entire conformity to the gradually developing conviction 
of trained economists who have given concern to the subject 
as an important branch of economic inquiry. There has been, 
as might be expected, and as pointed out by Willett, a singular 
lack of unanimity among writers on economics with regard to 
the division of economic theory in which the treatment of in- 
surance ought to be placed. I can not do better than con- 
clude this inquiry (which I believe is the first summary account 
of the consideration of insurance by economic writers from 
the time of Adam Smith to the present day) by quoting the 
concluding paragraph of the discussion by Willett: 

11 Some have considered it in connection with production, 
others have regarded it as a phenomenon of consumption, while 
still others have found it inexpedient to bring it under any of 
the recognized divisions, and have put it at the end of their 



INSURANCE ECONOMICS 

works along with other subjects of a more or less dubious 
economic character. There seems to be little occasion for such 
uncertainty. If the old divisions of production, distribution, 
exchange and consumption are to be maintained, there is no 
doubt that the proper place for the discussion of insurance, 
at least so far as insurance of capital is concerned, is in the 
department of production. With regard to the insurance of 
consumption goods the case may not seem so plain at first 
sight, since there is not the same direct relation between such 
insurance and the productivity of industry. Nevertheless, it 
undoubtedly belongs in the division of production. It belongs 
there, not because it affects the productivity of other capital, 
but because the creation of security is in itself a form of pro- 
duction. If the owners of consumption goods are willing to 
pay a price for the sake of having them insured, it is evident 
that they are obtaining something in exchange which is of more 
value to them than the money with which they part. What 
they obtain is security, and whether or not it seems best to 
consider such security as a consumption good, or as any form 
of wealth, it cannot be questioned that the capital and labor 
engaged in creating it are serving mankind in the same way as 
that employed in the creation of any commodity for which 
consumers are willing to pay." 

LIST OF REFERENCES. 

Allan H. Willet, " The Economic Theory of Risk and Insurance." New 
/ "Vork, 1 90 1. 
J. A. Hobson, " The Industrial System." London, 1909. 
Irving Fisher, "The Nature of Capital and Income." New York, 1906. 
Adam Smith, " An Inquiry into the Nature and Causes of the Wealth 

of Nations." Edinburgh, 1835. 
John Stuart Mill, " Principles of Political Economy." New York, 1878. 
Robert Ellis Thompson, " Elements of Political Economy." Phila- 
delphia,* 1875. 
William Roscher, " Principles of Political Economy." Translated by 
John J. Lalor. New York, 1878. 
y Francis A. Walker, " Political Economy." New York, 1888. 
■/ Michael Macmillan, "The Promotion of General Happiness." Lon- 
I don, 1890. 

Alfred Marshall, " Principles of Economics." Vol. I. New York, 1898. 
/ Henry Dunning Macleod, "The History of Economics." London, 1896. 

Arthur Twining Hadley, " Economics." New York, 1897. 
v Frank A. Fetter, " The Principles of Economics.' New York, 1904. 

89 



i 



V 



INSURANCE ECONOMICS 

Edwin R. A. Seligman, " Principles of Economics." New York, 1905. 
Richard T. Ely, " Outlines of Economics." New York, 1905. 
Henry Holt, " On the Civic Relations." New York, 1907. 
Frederick A. Cleveland, " Funds and Their Uses." New York, 1904. 
C. F. Bastable, " Public Finance." London, 1903. 
Edward T. Devine, " Economics." New York, 1898. 
Carl C. Plehn, " Introduction to Public Finance." New York, 1897. 
' P. Kropotkin, " Mutual Aid." New \'ork, 1907. 
" Fabian Essays in Socialism," edited by G. Bernard Shaw, Boston, 

1909. 
Irving Fisher, " Introduction to Economic Science." New York, 1910. 
Richard. T. Ely, "Socialism and Social Reform," New York, 1894. 
John Graham Brooks, "Social Unrest," New York, 1905. 
Henry George, Jr., "Menace of Privilege," New York, 1905. 
Werner Sombart, "Socialism and the Social Movement," New York, 1898. 
Edward T. Devine, "Principles of Relief," New York, 1904. 



90 



CHAPTER III. 

INSURANCE AS AN ELEMENT OF EARLY COMMERCE. 

All commerce, ancient or modern, is more or less in the 
nature of a speculation, and, quite properly, the early traders 
were often styled "merchant adventurers," because of the sub- 
stantial risk necessarily inherent in all commercial undertak- 
ings on a large scale. The most successful merchants and 
traders are invariably men of remarkable judgment and fore- 
sight, gifted with exceptional ability to determine in advance, 
with accuracy and precision, the probable chances of commer- 
cial gain. In proportion as the sphere of commercial enterprise 
expanded, the risk of uncertainty necessarily increased, and 
in no field as much as in that of maritime commerce and world- 
wide navigation. The perils of the sea, much more so in the 
ancient past than at the present time, early suggested and 
later made imperative, an equalization of losses among shippers 
and merchants by a combination of interests, equivalent to a 
reduction of the risk. The earliest maritime codes extant 
contain definite rules of contributionship as an established 
principle of mercantile law governing the sea trade of the 
period. The practice of jettison, or the "throwing overboard of 
part of the cargo, or anything on board the vessel, or the cutting 
or casting away of masts, spars, rigging, sails, or other furni- 
ture, with the object of lightening or relieving the vessel in 
case of emergency or necessity," is clearly defined in the Rho- 
dian Sea Law, which dates from about 900 B.C. 

The Principle of Contributionship and Average. 
The principle of contributionship, as applied to marine 
insurance, is stated by Walford to be "that those whose goods 

91 



* 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

or interest in risk have been saved or benefited by the damage, 
loss or sacrifice of others, should not profit at the expense of 
others," and that, therefore, "those whose goods have been 
sacrificed or damaged, or suffered charges for the common 
good, advantage, or safety, ought to be indemnified," and 
that, therefore, "justice requires that equality should take 
place by contributions amongst all those interested and who 
have been in danger of losing all, and where some have saved 
what was in risk only because others have sacrificed theirs."* 

But the principle of contributionship, which, by its nature, 
implies the joint assumption by different parties of unavoid- 
able risk in maritime commerce, is not the only conclusive 
evidence of the origin of marine insurance practice in ancient 
maritime laws and usages. The practice of bottomry and 
respondentia bonds, or the lending of money at maritime inter- 
est in return for the assumption of maritime risk, was widely 
established even in very early times and extended references 
thereto occur in the Rhodian Law, the Laws of Oleron (1075- 
1270 A. D.), and the Laws of Wisby, promulgated in 1288 A. D. 
The last named laws are the first in which marine insurance is 
referred to as an established commercial practice of the times 
and by a broad interpretation of the terms used it included 
life insurance in a primitive form in the assumption of risk on 
the life and safety of the master or owner against the perils 
of the sea, including piracy and capture by the enemy. 

The Sea Laws of Oleron and Wisby form the basis of the 
justly famous marine ordinance of France, enacted in 1681, 
which, in the words of Flanders, embodies "in systematic order 
the subjects of navigation, shipping, insurance and bottomry." 
Marshall, in his treatise on the law of insurance, the first Amer- 
ican edition of which was published in 1808, observes that 
"The law of insurance is considered as a branch of marine 
law and was borrowed by us from the Lombards, who first 
introduced the use of this contract into England. It is also 
a branch of the law of merchant, being found in the practice 
*Ins. Cyclopedia, Vol II, p. 112. 

92 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

of merchants, which is nearly the same in all countries where 
insurance is in use; and indeed merchants themselves were, 
for a long time, the only expounders of it. The law of mer- 
chants not being founded in the institutions or local customs 
of any particular country, but consisting of certain principles 
which general convenience has established, to regulate the 
dealings of merchants with each other in all countries, may 
be considered as a branch of it all." The sources of the law 
of insurance, in the words of Marshall, are, "first, the ordinances 
of different commercial states; second, the treatises of learned 
authors on the subject of insurance; and third, the judicial 
decisions in this country (England) and others professing to fol- 
low the general marine law and the law of merchants.* It is thus 
apparent that the practice and the law of insurance have been 
evolved out of the principles and practice of commerce through 
centuries of human experience as a logical necessity or aid 
to the development or furtherance of commercial enterprise 
throughout the world. 

Importance of Early Law and Custom. 
A somewhat extended consideration of the early laws and 
usages, with particular reference to maritime commerce and 
legislation, is indispensable for a sound understanding of the 
basic principles which govern the use of insurance practice in 
modern life. In the course of the many intervening years, 
with the growth of commerce and the differentiation of human 
effort, many new and novel forms of insurance have come into 
existence, some of which touch but remotely commercial under- 
takings considered in the strictest sense of that term. But 
insurance in every form, or by every method, is based upon 
contractual considerations and implies the assumption of risk 
in return for a definite payment of money at stated intervals. 
The considerations which govern the insurance contract are, 
therefore, strictly commercial and the whole business of insur- 
ance is carried on as a species of commerce, mostly through 
♦Marshall on Insurance, 2d American ed., pp. 18, 19. 
93 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

corporations organized and conducted in identically the same 
manner as commercial undertakings generally. Insurance in 
any one of its many and varied forms is sold the same as other 
merchandise, it has its price, which is governed by its cost and 
competition, and, as occasion may arise, by supply and demand, 
particularly in the case of war or impending maritime disaster. 
The rate in marine insurance is governed by the risks inherent 
in maritime commerce and inland navigation, which vary 
widely in their nature, according to distance, locality, and time. 
For all practical purposes, the principles which govern the 
assumption of commercial or individual risks at the present 
time are exactly the same as those which governed in ancient 
law and custom, and however remote the analogy may seem, 
it is nevertheless a true and connected chain of historic evidence 
which binds together the distant commercial period with the 
present, however unlike the conditions at the two extremes 
may appear when contrasted in the light of the marvelous 
changes which have taken place. 

Bottomry Laws and Usury Loans. 

Bottomry loans are the earliest form of maritime contracts 
in which are combined the elements of risk assumption in return 
for a special consideration. The risk assumed in bottomry loans 
is that the money lent is not to be returned if the vessel is lost, 
while the special consideration is maritime interest, or a rate in 
excess of the legal rate, but not in conflict with the usury laws. 
The leading case in which legal sanction was given to this prac- 
tice in English courts of law was decided by Lord Chief Baron 
Hall, who held that "this (bottomry) bond is not within the 
statute (of usury), for this is the common way of assurance 
and if this were void by the statute of usury, trade would be 
destroyed."* 

The commercial nature of this form of contract in navi- 
gation is so self-evident that it requires no legal decisions to 
define its position in the practice of insurance. As quoted 
*The Law of Usury, by J. W. Blydenburgh, New York, 1844. 
94 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

by Hall, who was the first American commentator on mari- 
time loans (Baltimore, 1811), "There is a great resemblance 
between contracts of maritime loans and insurance. They 
frequently appear to be governed by the same rules. They 
are twin brothers to whom maritime commerce has given, 
birth; for each has a character peculiar to itself." And he 
continues, "It is beyond doubt that this contract, without 
which commerce would languish extremely, is lawful. The 
interest which the lender claims in case of a successful voyage 
is the price of hazard, and has nothing in it which resembles 
usury." Walford refers to bottomry loans as " very ancient — 
apparently coeval with the earliest development of maritime 
commerce," "that they were apparently devised with the view 
of defeating various restrictions to usury ; — or, if not especially so 
devised, were very soon specially adapted to that end; and that, 
they being in themselves a species of marine insurance, are 
supposed to have led directly up to the present system of marine 
insurance." The reference to bottomry loans in the Rhodian 
Law is stated by Walford to be, "If masters or merchants 
borrow money for their voyages, the goods, freights, ship and 
money being free, they shall not make use of suretyship except 
there be some apparent danger of the sea or of pirates. And 
for the money so loaned the borrowers shall pay naval interest." 

The Rhodian Sea Law. 
Six chapters of the Sea Law deal with loans of this char- 
acter, but it is conceded that the references in the original 
text were very obscure. Mr. Ashburner, the most learned 
commentator on the Rhodian Law, explains that although 
the terms in which loans of this kind are expressed differ, they 
remained substantially the same from the age of Demosthenes 
to the 13th Century, and that while there are differences in the 
wording of the documents, they do not necessarily imply cor- 
responding differences in the legal effect of the transactions. 
Maritime loans under the Rhodian Law, according to this 
writer, "resemble ordinary loans upon a contingency, but there 

95 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

is evidence that both in antiquity and the Middle Ages the 
forms of the maritime loans were made use of for contracts 
which were purely aleatory," or, in other words, in the nature 
of gambling ventures. The important distinction to be observed 
in this brief discussion is that bottomry loans were a species 
of contract based upon risk assumption, and while their language 
varies and their purpose and nature, according to the time and 
circumstances, the underlying object, or purpose, was in all 
cases the same and strictly in the nature of marine in- 
surance. As pointed out by Mr. Ashburner, the actual com- 
mercial facts do not always correspond exactly to the language 
of the documents, for conveyors get into the habit of using 
certain forms the legal effect of which has been precisely fixed 
by decisions or by usage. Hence, although the commercial 
facts differ from those which the phrase was originally framed 
to express, the conveyor goes on using it, although there may 
be an important change in commercial conditions, even though 
there is no change in the language of the documents. Par- 
ticularly is this the case where circumstances make it necessary 
to adopt expediencies such as were imperative when the Church 
held that maritime risk did not justify the taking of interest. 

Historical Value of Commercial Documents. 
To the foregoing must be added the further explanation, 
also set forth by Ashburner, that few commercial documents 
have been preserved in the original, since business men only 
preserve documents which enable them to enforce or resist 
a claim. Documents, however, which have value only for a 
definite period of time are usually destroyed when the limit 
of their practical usefulness, or value, has passed. This is as 
true of policies of insurance as of charter-parties, bills of lading, 
etc. But there is sufficient evidence in ancient maritime loans 
to sustain the conclusion that practically co-incident with the 
beginnings of an extensive commerce by sea, bottomry loans came 
into existence and that out of these, in course of time, developed 
the modern practice of marine insurance, which again gave rise 
96 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

to all the other forms of insurance which have been developed 
and perfected at later periods. 

Historical Continuity of the Doctrine of Average. 
The basic doctrine in marine insurance is general average, 
of which, according to Duckworth, the best and most generally- 
accepted definition is "All loss which arises in consequence of 
extraordinary sacrifice made, or expense incurred, for the 
preservation of the ship and cargo, comes within general average 
and must be borne proportionately by all who are interested." 
This doctrine of general average, according to the same authority, 
is admittedly "founded upon the Rhodian Law and general 
average loss is calculated according to the laws in force at the 
port of discharge." The Rhodian Law of general average was in 
its entirety incorporated in the Roman Civil Law and as such 
it became in time incorporated in the practice of the Admiralty 
Courts of Europe and America. According to Walford, the 
connecting link, so far as England is concerned, is directly 
obtained in the fact that William the Conqueror made, and 
Henry I ratified, the law concerning goods cast overboard by 
mariners in a storm, founded upon, or, as Molloy says, in 
imitation of, the ancient Rhodian Law.* Since it is not the 
present purpose to consider in detail the origins of insurance 
in all its branches, but merely the historic relation of insur- 
ance to ancient and modern commerce, it is not necessary 
to enlarge upon the qualifications of the term "average," nor 
even its main divisions into general and particular, which are, 
however, essential for a full understanding of the first prin- 
ciples of marine insurance. The doctrine of average, however, 
applies, in many countries, at least, also to fire insurance, the 
clause being most commonly introduced into mercantile poli- 
cies and agricultural (hail, wind storm, etc.), insurance. Here, 
again, the limitations of the present inquiry preclude a more 
extended consideration of the details of a subject which itself is 
one of unusual interest and great practical importance. 

♦Ins. Cycle, Vol. I, p. 225. 

97 



insurance as an element of early commerce 

Early Ordinances Regulating Insurance Practices. 

At the commencement of the 15 th Century the practice 
of insurance had become quite general with European com- 
mercial nations. As early as 1435 ordinances regulating the 
insurance business had been adopted at Barcelona which re- 
quired that underwriting should be done in the presence of a 
notary and policies not thus authenticated were to be considered 
null and void. As early as 1468, by a decree of the Grand 
Council of Venice, insurance cases were required to be tried 
before the Consular Mercantile Court, and by 1523 a complete 
code of insurance laws had been enacted at Florence.* 

From Italy, no doubt, the practice of insurance was in- 
troduced into England through the Lombards, f for the earliest 
policies in existence, both marine and fire, contained the pro- 
vision that "This writing or policy of assurance shall be of as 
much force and effect as any writing heretofore made in Lombard 
Street." The significance of this provision is emphasized by the 
fact that during Colonial times policies issued in America, 
certainly as early as 1746, (which is the date of the oldest 
American insurance policy in existence J) contained the identical 
phraseology just referred to. 

In 1556 Henry III., King of France, issued an edict con- 
cerning the Court and authority of the Prior in Councils of 
Roan, including the provision that, "As we are informed that 
the trade of assurances is of late greatly advanced by merchants 
of the said city of Roan (a work so honorable that it does yet 
beautify and greatly advance the trade and commerce of the 

* For a convenient summary account of the early history of insur- 
ance, see John Beckmann's "History of Inventions, Discoveries and 
Origins," 4th English Ed., London, 1846, Vol. I, article on Insurance. 

f Park, System of Marine Insurance, 7th Ed., London, 1817, Vol. I, 
p. xxxviii. 

X An account of Early Insurance Offices in Massachusetts from 1724- 
180 1, by E. R. Hardy, Librarian, Insurance Library, Boston, 1901. 
For an account of the early insurance practices in America, see the 
History of the Insurance Company of North America, Phila. 1885, 
p. 14, et seq. 

98 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

said city)." It was, therefore, enacted that the merchants 
should choose one among them, "such an one as they should 
think meet, being a man trusty and expert in the knowledge 
of the trade of assurances," who should make and register the 
said policies of insurance. This, no doubt, was for the purpose 
of bringing about uniformity in insurance transactions, for it 
was further ordained that all judges and others concerned 
should thereafter give full credit to the transactions thus made 
a matter of record, and not "meddle in the said business of 
assurances or anything thereunto belonging." 

The Ancient Law Merchant. 
It is made evident by these references that insurance at 
this very early period was clearly recognized as an important 
element and instrumentality of commerce. Insurance laws 
and usages had, in fact, become as much a part of the Law 
Merchant as bills of exchange and other mercantile instrumen- 
talities invented or designed for the purpose of extending and 
facilitating commercial relations. Vance,* in the historical in- 
troduction to his treatise on Insurance Law, refers to this 
period, as follows: "It is thus seen that during the fourteenth 
and fifteenth centuries the practice among merchants of making 
insurance contracts had become general throughout all the 
maritime states of Europe. The contracts seem to have been 
confined to those merchants engaged in the more extensive 
international commerce, and this fact rendered necessary uni- 
formity in the regulation of insurance as practiced in these 
different countries. Thus there was impressed upon these 
insurance regulations, just as well as upon other commercial 
rules growing out of the custom of merchants, a certain inter- 
national character, and the whole body of rules intended to 
govern these commercial transactions became known as the 
'Law Merchant.' These rules bore a peculiar relation to the 
respective systems of law existing in the several countries in 

♦Handbook of the Law of Insurance, by Wm. R. Vance, St. Paul, 
Minn., 1904, p. 4, et seq. 

99 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

which the Law Merchant, by virtue of the customs of mer- 
chants, prevailed." 

The Beginning of Insurance Regulation in England. 
By 1600 marine insurance had become firmly established 
in England, and in the year following, by the 43rd Elizabeth, 
a Court of Insurances was established in London, for the pur- 
pose of affording facilities for settling disputes arising under 
insurance policies. The Court included among its members 
eight merchants with full power and authority to see, examine, 
order and decree, all and every case, or cases, concerning 
policies of assurances in a brief and summary course, as 
seemed best according to their discretion and without formali- 
ties, or pleadings, or proceedings.* With the statute of 1601 
begins in English law the Parliamentary regulation of insurance, 
governing chiefly as to the construction of the contract in 
courts of law and the manner of its making and enforcement. 
A similar regulation of insurance was introduced into Rotterdam 
in 1604 and into the French Code, known as the Guidon sur 
la Mer, in 1607. A Chamber of Insurance was also established 
at Amsterdam in 161 2 f and ten years later Malynes published 
his famous treatise Lex Mercatoria, or the Ancient Law Mer- 
chant, a third edition of which was published in 1686. J 

Insurance as a Branch of the Law Merchant. 

Malynes considered the whole subject of insurance in all its 
branches and among other rules he enumerated twelve cardinal 
principles of knowledge as the foundation of complete mercan- 

* Regarding the history of this unique court very little is known 
with accuracy. The most complete account is in Walford's Ins. Cycle, 
article Chambers of Insurance, Vol. I, p. 486, et seq. See also, Park, 
System of Marine Ins., Vol. I, p. xi. Also, Wambaugh, Cases on Insur- 
ance, which gives in full the act establishing the Court of the Com- 
missioners, 43rd Elizabeth, c. 12 (1601). 

fWalford, Ins. Cycle, Vol. I, p. 485. 

I Malynes (Gerard) Consuetudo vel Lex Mercatoria, or the Ancient 
Law Merchant, London, 1622, (Copy in Ins. Library, Boston, Mass.). 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

tile instruction, of which two relate to insurances, as follows: 
" ist, Delivery of monies at interest or upon bottomry, or upon 
lives, annuities, or pensions, etc.," and 2nd, "The manner of 
making assurances upon goods, ships, the persons of men, or 
any other things adventured by sea or by land; or the customs 
observed between different nation or nations." In addition, 
however, numerous references to insurance occur throughout 
the work and various appendices which supplement the third 
edition, published in 1686. He refers to the "most laudable 
custom of assurances," to the end that merchants might enlarge 
and augment their traffic and commerce and not adventure all 
in one bottom to their loss and overthrow, but that the same 
might be answered for by many." He traces the origin of 
this custom to the ancient Sea Laws and merchant codes of 
maritime nations. The importance of this reference to the 
ancient Law of Merchants by Malynes consists in the fact that 
all insurances are recognized as mercantile transactions and as 
an aid and encouragement to commerce, including insurances 
on lives. To once more quote his language, perhaps rather 
quaint, but well adapted to the needs of the period, "For by 
the custom of insurances it is intended to avoid ca villa tions ; 
every insurer should be bound ipso facto to the said assurance, 
having a respect to the augmentation of traffic and commerce" 

Admiralty Jurisdiction Over Insurance. 
The third edition of Lex Mercatoria, published in 1686, 
has as an appendix a treatise on the jurisdiction of the admiralty 
of England by Richard Zouch. Numerous references to insur- 
ance occur therein and among others the important statement 
that the admiralty of England had the most ample power and 
jurisdiction over business relating to the sea, "to hold conusance 
of pleas, debts, bills of exchange, policies of assurance, charter 
parties, bills of lading, etc." These and other references to 
insurance prove conclusively that in the opinion of these early 
writers and, in fact, in daily life and by commercial custom 
and usage, insurance even three hundred years ago was con- 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

sidered an important element of the commerce of the period. 
While not ignoring the fact that most of the insurance contracts 
made by merchants at this time were of marine insurance, and 
probably to a not inconsiderable extent loans upon bottomry and 
respondentia, still the general character of the business upon the 
basis of the earlier definitions would seem to conclusively establish 
that insurance transactions as a whole were included in the Law 
Merchant as ordinary mercantile transactions and considered an 
indispensable element of everyday commercial life. 

French Ordinances on Commerce and Marine Insurance. 
In 1673 an ordinance of commerce was enacted in France 
under the auspices of Colbert, as Minister of Finance to Louis 
XIV and this enactment in 1681 was followed by a correspond- 
ing ordinance of marine, which is justly considered the most 
complete code of maritime and commercial law that was ever 
attempted to be framed and which, considering the originality 
and extent of the design, in the opinion of Duer* and other 
writers on insurance, deserves to be ranked among the noblest 
works that legislative genius and learning have ever accom- 
plished. The great importance to insurance interests, of this 
ordinance, or code, lies in the elaborate consideration which 
is given to insurance practices and the regulation of the busi- 
ness by government. As pointed out by Duer, "Perhaps the 
most valuable portion of this ordinance is that which relates 
to insurance, and of this no more striking proof can be given 
than the results from the fact that the framers of the present 
commercial code of France have adopted these chapters of the 
ordinance, not merely as a basis, but as the substance of their 
own labors on the same subject, so that the provisions (relating 
to insurance) in the two codes are nearly identical, "f 

* Duer, John, The Law and Practice of Marine Insurance, deduced 
from a critical examination of the adjudged cases and the general usage 
of commercial nations, Vol., 1, p. 43, N. Y., 1845. 

t For a full account of the Ordinance of 1681 see Walford's Ins. Cycle' 
Vol. IV, p. 310; also Park, System of Marine Insurance, 7th ed., Vol. I, 
p. xxxiii, et seq. 



insurance as an element of early commerce 

On Contracts Depending on Chance. 

Beginning with the 18th Century, the first important 
work giving a brief consideration to insurance in its relation 
to commerce, is the classic treatise on the Law of Nature and 
Nations by PufTendorf, Counsellor of State at one time to the 
King of Sweden and at another time to the King of Prussia. 
The first edition was printed in 1 7 1 2 , and the third in 1 7 1 7 . * The 
work includes a chapter on " Contracts Depending on Chance," 
the eighth section of which treats of insurance. There occurs 
therein the following significant passage: "To these contracts, 
that of insuring bears some affinity; when for a certain sum a 
man takes upon him the risk that goods are to run in transpor- 
tation from place to place, usually by sea; which, if they happen 
to be lost, the insurer is bound to make good." The passage 
emphasizes the view that insurance not only was considered 
by this eminent author an element of commerce, but an element 
of commerce in course of transportation, while the fact that 
works of this character were translated into English, no doubt, 
explains, in part at least, the similarity between English and 
Continental customs and the incorporation into English law 
and usage of legal provisions which can be traced back to the 
commercial codes and sea laws of many other and more ancient 
nations. 

First Discussion of Insurance in American Literature. 

A few years later [1725] there was published in Phila- 
delphia a tract of great historical value, by Francis Rawle, 
author, and Benjamin Franklin, printer, with the curious title 
"Ways and Means for the Inhabitants of Delaware to Become 
Rich." The tract is referred to in the History of the Insur- 
ance Company of North America, f according to which the author 

* Of the Law of Nature and Nations, written in Latin by Baron PufTen- 
dorf and translated into English by Basil Kennet, D. D., 3rd Ed., Lon- 
don, 1 717, Chap. IX on Contracts depending on Chance. 

f History of the Insurance Company of North America, Phila., 1885, 
P- i5- 

103 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

"classes insurance as a branch of trade, which, while helpful 
to the adventurer on risks by sea, would as well be promotive 
of commerce and agriculture." The author held the view that, 
"Having thus far discoursed of most of the branches of trade 
we are capable of, there is yet one great encouragement, to 
adventure in the discovery and prosecution of new markets; 
more safe to the industrious adventurer; namely an insurance 
office in one or more of these colonies; which is the interesting 
of divers in the loss or profit of a voyage, and is now become 
so much the practice of England, that insurance may be had 
in divers cases as well against the hazards at land, as cas- 
ualties at sea, which must be acknowledged not only to be 

safe, but a great encouragement to adventure This will 

be good and safe and cannot be easily overset by a few losses ; 
and we conceive will contribute to keep up the value of our 
paper credit by promoting of trade, navigation and building 
of ships, and in consequence of great advantage to this river: 
which we confer to the consideration of the merchant." 

Early Insurance Advertisements. 
This is probably the first reference to insurance practice 
in American literature, but mention may be made in this con- 
nection of the fact that the first advertisement of the opening 
of an insurance office in this country, that is, in Philadelphia in 
1 72 1, was in the American Weekly Mercury, of May 25th of 
that year, which commences with the significant statement that 
"Assurances from losses happening at sea, etc., being found to 
be very much for the ease and benefit of the merchants and 
traders in general ; and whereas the merchants of this city of 
Philadelphia and other parts have been obliged to send to 
London for such assurance, which has not only been tedious 
and troublesome, but even very precarious," it is proposed, 
etc., etc.* 



* History of the Insurance Company of North America, Phila., 1885, 
P- 15- 

104 



insurance as an element of early commerce 

Encouragement of Trade by Insurance. 
In 1745, John Cary, a merchant of Bristol, England, 
published an extremely interesting tract* with the title " A 
Discourse on Trade," which contains an important and ex- 
tended reference to insurance. Since this tract is almost un- 
known, the reference to insurance is quoted in full, to explain 
the views of the author on the necessity of Parliamentary 
interference with insurance practice, to bring about much 
needed reforms. After discussing trade in general and the best 
possible means of bringing about a revival of a declining com- 
merce with other countries, Cary observed with reference to 
insurance, that: 

" I cannot close this discourse without speaking something 
of insurance. The first design whereof, was to encourage the 
merchants to export more of our product and manufactures, 
when they knew how to ease themselves in their adventures, 
and to bear only such a proportion thereof as they were willing 
and able to do; but by the irregular practices of some men, 
this first intention is wholly obviated; who without any interest, 
have put in early policies, and gotten large subscriptions on ships, 
only to make advantage by selling them to others ; and there- 
fore have industriously promoted false reports, and spread 
rumours, to the prejudice of the ships and masters, filling men's 
minds with doubts, whereby the fair trading merchant, when 
he comes to insure his interest, either can get no one to under- 
write, or at such high rates, that he finds it better to buy the 
other policies at advance; by this means these stock-jobbers 
of insurance, have, as it were, turned it into a wager, to the 
great prejudice of trade: likewise many ill-designing men, their 
policies being over-valued, have (to the abhorence of honest 
traders, and to the scandal of trade itself) contrived the loss 
of their own ships. On the other side, the underwriters, when 
a loss is ever so fairly proved, boggle in their payments, and force 
the insured to be content with less than their agreements, for 
fear of engaging themselves in long and chargeable suits. 

" Now if the parliament would please to take these things 
into their consideration, they may reduce insurance to its first 

*A Discourse on Trade, by John Cary, a Merchant of Bristol, Lon- 
don, 1745, p. 93; see also Dictionary of Commerce, by Postlethwayt, 
and Ed., pub. London, 1751, p. 142. 
ios 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

intention, by obliging the insured to bear such a proportionable 
part of his adventure, (the premio included) as to them shall 
seem fit, and also the insurers, when a loss is fully made out, 
to pay their subscriptions without abatement, which will pre- 
vent both; and if any differences should arise, to direct easy 
ways for adjusting them, without attending long issues at law, 
or being bound up to such nice rules in their proofs, as the affairs 
of foreign trade will not admit. 

" I know, that by a clause in a statute made prima Annae 
the wilful casting away, burning, or otherwise destroying a ship, 
by any captain, master, mariner, or other officer belonging to it, 
is made felony, without benefit of clergy; but that statute is 
so qualified, that it is difficult to convict the offender, because 
the fact must be done, to the prejudice of the owner, or owners, 
or of any merchant or merchants that shall load goods thereon, 
else he doth not come within its penalty, so it doth not reach 
the evil I here mention, viz., the abominable contrivance of the 
owners to have their own ships destroyed, in order to make an 
advantage by their insurances; a crime so black in itself, that 
it cannot be mentioned without horror. These men, when they 
frame their dark designs, will take care, for the security of those 
they employ, that none besides themselves shall load goods 
on the ships they intend shall be thus destroyed, and it cannot 
be supposed that they receive prejudice thereby themselves, 
so the prosecution on that statute is evaded; but if the insured 
were bound to make out their interests, and to bear a pro- 
portionable part of the loss themselves, this would, as it were 
naturally prevent such scandalous practices." 

The Beginning of Insurance Science. 
In 1747 there was published in London a very suggestive 
essay on the Science of Insurance, by Corbyn Morris.* The work 
is practically limited to a consideration of marine insurance, but 
with important bearings upon the place of insurance in com- 
mercial relations. Insurance is referred to as, "that aid whereby 
the national commerce is supported." The work of this author 
confirms the view that insurance at this early period was not 
only considered an important element of commerce, but was in 

* An essay towards illustrating the Science of Insurance by the author 
of "A Letter of a Bystander," (Corbyn Morris), London, 1747- 
106 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

fact a distinct means or method whereby a considerable pro- 
portion of such commerce was made possible and advisable. In 
the words of the author, " Insurances give tranquillity and 
cheerfulness to the extensive trader; these only make it justi- 
fiable for him to venture in many branches of commerce, which 
are of great benefit to the nation; these enable him to lay a 
steady foundation of credit; to procure money upon easy terms, 
and to bring his goods cheap to foreign markets."* The tract 
contains many other and decidedly suggestive references to 
practices of insurance as an aid to commerce and the further- 
ance of commercial enterprise, at a period of time when such 
enterprise was particularly exposed to the perils of unknown 
seas and almost constant war between England and France. 

Five years later, that is, in 1752, Wyndham Beawes pub- 
lished his Lex Mercatoria Rediviva, or, A Complete Code of Com- 
mercial Law, a second edition of which was printed in London 
in 1 761. Insurance takes up almost sixty pages in this 
treatise and the references include every branch of the business, 
too elaborate to be reproduced here but they indicate as clearly 
as possible that on the part of this distinguished writer 
insurance was held to be an integral and indispensable element 
of commerce and commercial intercourse. 

Trade and Commerce Defined. 
In 1755 Richard Rolt published the first edition of "A 
New Dictionary of Trade and Commerce," including an ex- 
planation of all terms used in commerce, in which he makes 
extended reference to insurance. He, like many others, drew a 
distinction between commerce and navigation, which terms by 
many writers are not used interchangeably, as has since been 
the case in interpretations of the commerce clause of the Con- 
stitution. With reference to navigation and its relation to 
insurance, Rolt says that " In navigation, considered as a part 
of the skill of the merchant, is included, not so much the art of 



* Science of Insurance, by Corbyn Morris, p. 1, et seq. 
107 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

steering a ship, as the knowledge of the seacoast and of the different 
ports to which the cargoes are sent, the customs to be paid, the 
passes, permissions or certificates to be procured, the hazards 
of every voyage, and the rate of insurance"* 

Rolt gave a definition of commerce which is very broad 
and comprehensive, namely that "Commerce is the exchange 
of commodities, or the buying, selling, or trafficking of merchan- 
dise, money, or even paper for acquisition of profit" He specif- 
ically refers to bills of exchange as commerce, and insurance is 
defined as " The security given in consideration of a sum of money 
paid in hand to make good ships, merchandise, and houses, to 
the value of that for which the premium is received and in case 
of loss by storm, pirates, fires, and the like." As thus defined, 
insurance strictly falls within his previous definition of com- 
merce. Referring at the same time to abuses resulting from a 
miscarriage of effort in the development of insurance practice, 
he remarks that, " Though insurance was intended for the 
encouragement and security of trade, it has been frequently 
changed into a wager, to the great prejudice of commerce." 
That his conception of the commercial value of insurance was 
not limited to the marine branch is made evident by a passage 
which reads that " The establishment of these several offices of 
insurance from fire had been extremely beneficial to society; 
nothing was ever so well calculated for the encouragement of 
trade, nor was there ever any scheme so well adapted for the 
securing of private property." 

* In this connection, mention may be made of a discussion of Insur- 
ance and Average, in "The Merchants and Shipmasters' Assistant," 
by Jos. Blunt, New York, 1832, which includes chapters on Bills of 
Exchange, Freight and Demurrage, Insurance and Average, Pensions, 
etc. There is also an extended discussion of the Law of Marine Insur- 
ance and General Average in " The American Shipmasters' Guide and 
Commercial Assistant," by Francis G. Clarke, Boston, 1838. But much 
earlier than this, the subject of Marine Insurance was dealt with at 
length in " The Practical Navigator," by John Hamilton Moore, 1st 
American Edition, printed at Newburyport, 1799. 

108 



insurance as an element of early commerce 

The Foremost of Insurance Classics. 

By far the most important treatise ever published on 
insurance, particularly at a time when a comprehensive treat- 
ment of the subject was of imperative importance to aid in the 
establishment of insurance upon a sound and enduring basis, 
was the "Essay on Insurance" by Nicholas Magens, a mer- 
chant of Hamburg, published in two volumes in 1755. The 
work will ever remain a classic of the highest merit in insur- 
ance literature.* 

The first volume explains the nature of the various kinds 
of insurance practiced by the then commercial States of Europe, 
and showing their consistency or inconsistency with equity and 
the public good. The second volume is a collection of all the 
foreign ordinances of insurances and forms of policies translated 
into English, with remarks on such parts as are obsolete or 
defective. An English edition of this work was published in 
London in 1755, at which time Magens, apparently, was a 
resident of that city. The first volume contains a brief state- 
ment of the principles of business morality, which should not 
only underlie insurances, but all commercial relations: "The 
true scope and intention of all well-calculated commercial laws 
is, to unite the interest of every individual in such a manner, 
as that the whole community may be induced to act for the 
general good. If this principle be adhered to, and a due execu- 
tion of those laws, and an impartial administration of justice, 
follow; the merchant, who should be considered as the first 
mover, and the great spring of action in trade, will cheerfully 
pursue extensive views; and by his fortune, credit, and industry, 
advance the public weal." 

Relation of Early Commerce to Insurance. 
The work is of so comprehensive a nature that it is difficult 
to make a selection of extracts which would do justice to this 
distinguished writer and his advanced views upon the importance 

* An Essay on Insurance by Nicholas Magens, London, 1755, 2 Vols. 
(This work is in the Ins. Library, Boston, Mass.) 

iog 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

and dignity of insurance as a commercial institution. He 
discourses, among other subjects, upon the utility of insurance, 
in language which is full of meaning even at the present time: 
"Insurances promote trade and navigation, as thereby the risks 
of diligent, industrious, and inventive persons, of small capitals, 
are so lessened, that they may engage even in important under- 
takings. It is easily understood how the public are benefited 
thereby; and by taking such precaution, as making insurance, a 
gre ater share of confidence too is acquired among moneyed men, 
who seeing this wary way of proceeding of the merchant, are the 
more ready to assist him with their money, or to maintain his 
credit, by freely taking his bills of exchange. But though this 
be allowed, yet as the best institutions are subject to abuse, 
certain bounds and regulations are necessary, which, while they 
give such latitude as may promote and encourage trade, ought 
not to be so extremely wide as that ill consequences may ensue. 
That this consideration should be attended to in enacting all laws 
and ordinances relating to insurances, is not to be controverted; 
nor that it should also be had in view, in the explanation and 
application of those laws to particular cases. In our essay we 
shall do our utmost to point out, whatever experience has shown 
to deserve attention, and in what respects there seems to have 
been either too much, or too little, latitude given." The 
limitation of space makes it impossible to give additional illus- 
trations from this remarkable work, but it contains by far the 
soundest reasoning up to that time on the whole question 
that insurance is an element of commerce by the practice and 
usage of the commercial nations of the world. 

Insurance Essential to Commercial Security. 
In 1757 Postlethwayt published the second edition of his 
Classical Dictionary of Commerce, in two large volumes, chiefly 
based upon the French Dictionary of Commerce by Savary. 
From this and the fourth edition of the same work, which was 
published in 1774, the following extracts are quoted, as illus- 
trating that in the mind of this, one of the foremost writers of 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

his day, insurance formed an essential element of the commerce 
of the period. The work, among other subjects, in the words 
of the author, treats "Of the compilation of annuities on lives, 
leases and reversions, of insurance of shipping and merchandise, 
with great variety of curious cases relating to this essential part 
of mercantile commerce — with a political discussion of the point 
of the insuring the ship and merchandise of commerce in time 
of war." 

The author quotes at length from a Royal Message to 
Parliament, in 1720, relating to the charter of the Royal Ex- 
change and London Assurance companies, stating in part as 
follows: " His Majesty having received several petitions from 
great numbers of the most eminent merchants of the City of 
London, humbly praying that he would be graciously pleased to 
grant them letters patent for erecting corporations to assure 
ships and merchandise .... (and) His Majesty being of opinion 
that erecting two such corporations .... for assuring ships 
and merchandise under proper restrictions and regulations may 
be of great advantage and security to the trade and commerce of 
the kingdom, is willing and desirous, etc., etc." 

Assurance or Insurance. 
" Insurancing," he remarks in continuation, is a great 
encouragement to foreign commerce, seeing that it takes the 
weight of the hazard off from individuals and lays it upon 
numbers, yet these numbers are, upon the whole, gainers by 
undertaking the hazard." . . . . " The security of our trade, and 
in consequence thereof lessening our own insurancing and raising 
that of our enemies are of such important concernment to the 
nation that it may not be unacceptable to observe how, in time 
of war with France, a few ships of war may be employed to 
answer these purposes." " Assurance, or Insurance, a term 
in commerce, particularly foreign. It signifies a security, or 
assurance, given, in consideration of a sum of money paid, 
in hand, of so much per cent, to an insurer, or assurer, to in- 
demnify the insured from such losses as shall be specified in 

XII 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

policy of assurance, subscribed by the insurer, or insurers, for 
that purpose." " This being a point of very great importance 
to our trading interests, is the reason of dwelling so long upon it; 
for which we pray rather to have the approbation than censure 
of our readers. In regard to the nature of insurance in foreign 
countries, we shall represent them in their proper places." 
11 Bottomry, is a marine contract in commerce, for the borrowing 
of money upon the keel or bottom of a ship; that is to say, when 
the master of a ship binds the ship itself, that, if the money 
be not payed by the day appointed, the creditor shall have the 
said ship; and this taking up money on bottomry is commonly 
in nature of mortgaging a ship; and, in the instrument executed 
between the lender and the borrower, there is a clause which 
expresses, that the ship is engaged for the performance of the 
same." 

This writer also refers to the Act of George II, 1746, relating 
to insurance, in which occurred the sentence, " For the encour- 
agement of trade." [Vol. 1, p. 146] He also quotes from the 
famous case of Sadlers Company vs. Badcock,* decided at 
this time, containing the statement "and though in cases of 
commerce policies of insurance are allowed to be made, etc., etc.," 
all of which sufficiently confirms the view that Postlethwayt, 
as well as Savary, considered insurance an element of commerce, 
even though not perhaps a species of commerce itself. 

Development of the Law of Insurance. 
The accession of Lord Mansfield to the Court of Kings 
Bench as Chief Justice, in 1756, marked a new era in English 
and American insurance law, and the decisions and opinions of 
this distinguished jurist distinctly stamp the insurance contract 
as a commercial transaction subject to interpretation by the Law 
Merchant. No subsequent writer on insurance law has failed 
to refer in praise to Lord Mansfield for his transcending wisdom 

♦The case of Sadlers Company vs. Badcock in Chancery, Easter 
Term, 16 Geo. II, is given in full in Postlethwayt's Dictionary, Vol. 
I, P- 147- 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

and discriminating ability, but for the present purpose it must 
be sufficient to quote a brief extract from Vance,* as bearing 
upon the definition of insurance as an element of commerce. 
" This great judge, [Lord Mansfield] appreciating the peculiar 
circumstances that attended the making of mercantile contracts, and 
the importance of considering the usages and customs of mer- 
chants as determining their rights under such contracts, began 
a consistent effort to import into the common law such of the 
principles of the Law Merchant as would render the common 
law suitable for the administration of justice in regard to com- 
mercial rights. In order to determine what rules should be 
applied in deciding these causes, he looked to the various 
authorities that were in vogue on the Continent, such as have 
been mentioned above, and also had special juries empaneled to 
determine the customs of English merchants." And it is to 
Lord Mansfield that insurance is indebted for the dictum that 
11 All questions of mercantile law, but more particularly of policies 
of insurance, are extremely important and ought to be settled." 
The necessity for certainty in legislation and uniformity in 
rulings and regulations governing insurance transactions was 
fully as well recognized when this was written, at the very be- 
ginning of the modern business of insurance in its various branches, 
as it is true of the state of the business at the present time. 

Bills of Exchange and Promissory Notes. 
In 1759, Mr. Thomas Cunningham, of London, published a 
treatise on " The Laws of Bills of Exchange, Promissory Notes, 
Bank Notes, and Insurances." The title itself sustains the view 
that the writer considered insurance as strictly a commercial 
transaction and by implication an essential and important 
element of commerce. In fact, writers on the origin and history 
of bills of exchange often refer to the subject in connection with 
insurance. Among others, the earlier laws and ordinances of 
Barcelona, according to Beckmann,f refer to bills of exchange 

* Law of Insurance, St. Paul, Minn., 1904, p. 8, et seq. 
t Dictionary of Inventions, Vol. II, p. 203. 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

in a general discussion of "the maritime trade and other branches 
of commerce." Brokers engaged in joint financial and com- 
mercial transactions, as, for illustration, in Philadelphia as 
early as 1792, often styled themselves " Exchange and Insur- 
ance Brokers." In all matters of this kind American commercial 
practice and usage has largely followed foreign methods. Thus 
the institution of Lloyds Coffee House, which was the centre 
of English individual underwriting, was copied in a similar 
establishment erected in Philadelphia under the title " London 
Coffee House," in 1762,* and at which the original lists of 
shipping and marine intelligence, furnished by Lloyds of 
London, were made available to personal underwriters in 
Philadelphia. 

In the nature of the case, the value of insurance is in exact 
proportion to the risk assumed. During the last quarter of 
the 1 8th Century the most important commercial nations of 
the world were at war with one another and the American 
colonies were in successful revolt against the mother country. 
International commerce and navigation were most hazardous 
undertakings, for ships and goods were not only exposed to the 
perils of the sea, but even to the more uncertain and more 
hazardous risks of capture and destruction by the enemy. 
Bottomry loans in Massachusetts in 1767 brought twenty per 
cent., and in Salem in 1777, the rate paid for marine insurance 
was seventy-five per cent. Laws of shipping and insurance 
were rather a matter of mercantile custom and of the good 
faith of the underwriters than of statutory enactment. Fraud 
was common and the need of codification and of severe penalties 
was forcibly presented in the masterly treatise of Weskett,f pub- 
lished in 1 78 1. No more elaborate work than this on insurance 
has appeared since that date. It is a remarkably clear and 
comprehensive exposition of the principles and practice of 
insurance in its particular relation to commercial enterprise. 

* History of Insurance Company of North America, p. 21, et seq. 
t "A Complete Digest of the Theory, Laws, and Practice of Insur- 
ance, John Weskett, merchant, London, 1781. 

"4. 



insurance as an element of early commerce 

The First Comprehensive Dictionary of Insurance. 
The work of Weskett* is practically a comprehensive diction- 
ary of insurance, containing a concise enumeration of all the 
terms which were in common use at the time, with a full ex- 
planation of the practices and usages of every branch of in- 
surance as then known and understood. In an elaborate intro- 
duction Weskett presents an outline of the whole philosophy, 
science and law of insurance, which has not its counterpart 
in any subsequent treatise upon the subject. The rightful 
position of insurance as an element of commerce is set forth 
by Weskett in the following suggestive sentence: 

" The great utility of insurance, by means of which the 
value of property, in almost every situation, howsoever preca- 
rious, may be rendered safe against accidents, is so universally 
acknowledged, that there needs no attempt to prove, or explain 
it. Commerce is indubitably the grand source, from whence is 
derived all that enriches, strengthens, and adorns a State. 
Without an extensive and flourishing commerce, this nation 
could never have arisen to that superlative degree of grandeur 
in arts, arms, and wealth, which have made her the envy, and, 
till lately, the veneration of all other maritime States; and 
without insurance that commerce could neither have been pro- 
moted, nor carried on; nor can it ever proceed, unsupported 
by insurance; and, consequently, the national, as well as 
private advantage of well-regulated insurance is obvious and 
indisputable." 

An Early Plea for Insurance Education. 
The magnitude of the subject of insurance even at this 
early time suggested the necessity of qualified inquiry and 
study of the essential facts. Weskett suggests, therefore, that, 
in his opinion, 

" It would seem, therefore, that little argument is necessary 
to show that every possible countenance and aid, both public 
and private, ought to be given to the attainment and culti- 

*A Complete Digest of the Theory, Laws, and Practice of Insurance, 
John Weskett, merchant, London, 1781. 

US 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

vation of the knowledge and just practice of insurance ; as the 
primary and principal means by which the maritime and com- 
mercial interests of these Kingdoms can be maintained, cher- 
ished, and enlarged; and the property of the merchants, and, 
consequently, of all the other traders, manufacturers, and 
artisans, who depend on, or are immediately connected with 
them, can be rendered secure and permanent." 

The need of qualified inquiry into the principles and philos- 
ophy of insurance is further brought out in a sentence which 
holds as true at the present time as it did at an earlier date. 

11 There is scarcely any other occupation, or profession, 
though far more unimportant, and less abstruse or complicate 
than that of insurance, amongst the whole circle of arts and 
commerce exercised in this Kingdom, where some method of 
instruction is not looked upon as requisite; and, where the 
persons employed in it are not pretty well versed in the grounds 
and theory, and the greater part of them expert in the practice 
of the principles on which it ought to be prosecuted: — but, 
one may venture to assert that in no other class is there to be 
perceived so great a proportion of a numerous body of prac- 
titioners, who are so incompetently skilled in the nature of the 
matters about which they are occupied, and of the laws and rules 
by which they ought to be governed, as amongst those who are 
in the actual employment of, and whose avocations and concerns 
are immediately connected with, affairs of insurance." 

Cognizance in Law of Common Knowledge in 
Matters of Insurance. 
The law of insurance at this time was still in a very un- 
satisfactory state, but as a general principle the Law Merchant 
was relied upon to settle controversies between the insurers and 
the insured. Referring to the legal aspects of insurance in 
matters of commerce, Weskett remarks: 

11 From whence is it that the most profound adepts, and 
sages of the law, derive their fancied superiority of skill, in the 
rules of justice, in matters of commerce and insurance? Hath 
it not, always, been from the informations and explanations 
of experienced and judicious merchants and insurers ; from time 
to time given, in the several cases, which have been introduced, 
116 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

discussed, and decided in courts of judicature? — and, what 
lamentable absurdity, and confusion of ideas, might not have 
been observed, in the argumentations there, upon such matters! 
— yet, do we not, sometimes, idly look up to, as oracles, those, 
whom intelligent men amongst ourselves have, in reality, in- 
structed ? Those affairs are often accompanied with such new 
and various circumstances and contingencies; and depend 
so much upon nice distinctions of special customs and usages; 
that the common law of England tacitly acknowledges its own 
imperfection, in this respect, by allowing the Lex Mercatoria, 
i. e., the custom of merchants, — wherein themselves, only, 
are properly skilled; and of which, consequently, themselves, 
only, can be the proper judges, — to pass as law." 

Drawbacks and Duties, Smuggling and Piracy. 

These and other innumerable remarks and observations by 
Weskett fully establish the strictly commercial origin of 
insurance and its great utility in the commercial development 
of the period. Among the particular subjects considered in 
much detail are the insurance aspects of drawbacks and duties 
on goods and freight, of robbery of goods insured, of smuggling 
and prohibited goods, all involving insurance considerations, 
some of which are now obsolete or mere matters of curiosity. 
Considering always the disturbed condition of the time and 
almost unceasing warfare between great nations, the insecurity 
of the sea, the widespread practice of smuggling and the arbi- 
trary enforcement of ill-advised commercial regulations, it is 
but natural that the necessary degree of security against probable 
loss in commercial enterprises of many kinds should have been 
sought in the practice of insurance. 

Questions of piracy, ransom, letters of marque, neutral 
ships, passports and hostage, all had their important insurance 
aspects, made evident not only by the theoretical discussions, 
but by the numerous cases decided in courts of law. In the 
case of Goss vs. Withers, Lord Mansfield said that in Spain, 
Venice and England the goods go to the captor of a pirate, against 
the owner, as there can be no condemnation to entitle the pirate ; 
a capture by a pirate, or a capture under a commission, where 

117 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

there is no war, does not change the property; yet, as between 
insurer and insured, they are just upon the same foot as the 
captures by an enemy. It was then the practice to insure against 
the loss of personal freedom through capture by pirates and the 
Ordinance of France permitted this to be done, providing that 
" Those who shall redeem captives may insure on them the 
price of their ransom, which the insurers shall pay if on their 
way back they should be re-taken, killed, drowned, or if they 
die otherwise than by a natural death." 

Privateering and Rates of Insurance. 

The common practice of privateering during a time of 
maritime war often led to disastrous results to shipping, which 
required the extensive use of maritime insurance to grant 
the necessary degree of security to commerce by sea. Privateers 
being private ships of war fitted out for the particular purpose 
of destroying the commerce of the enemy and subject only to 
the law of nations, more or less ill-defined, it was permitted 
by an English statute to make "assurance on private ships of 
war fitted out by His Majesty's subjects solely to cruise against 
his enemies, and such assurances might be made by or for the 
owners, interest or no interest, free of average, and without 
benefit of salvage to the insurer."* Endless complications ensued 
out of this practice, chiefly because of a disputed state of fact, 
always more or less difficult to determine even by the most 
searching inquiry. A discussion of the proper function of in- 
surance in maritime war would require separate and extended 
consideration. The subject has found its most practical illus- 
tration in the so-called French Spoliation Cases, a large number 
of which involved considerations of insurance.! 



* Statute 19, George II, chap. 37, sec. 2; see Weskett, p. 413. 

t For a full and very convenient account of the French Spoliation 
Claims, with special reference to insurance companies, see " Statements 
and Papers before the Committee on Claims of the House of Represen- 
tatives, on House Bill 22534, 61st Congress, 2nd Session, March 30, 
1910, including statement of J. Henry Scattergood, President of the 

118 



insurance as an element of early commerce 

The Liverpool Privateers. 
The distinction between piracy and privateering is never 
very precise, at least not in many of the cases which have found 
their ultimate settlement in the courts. In no field has this been 
more clearly brought out than in the history of the privateers 
and' the slave trade of Liverpool during the period beginning 
with 1744 and ending with 181 2. The law of prizes makes the 
distinction of ships and goods taken by letters of marque, those 
taken from pirates or sea rovers, and those taken from professed 
enemies. The jurisdiction of such cases comes within the practice 
of the courts of admiralty which from the earliest times have 
taken cognizance of insurance. The Ordinances of Hamburg 
provided that " Any person who in time of war buys a prize, 
that has not yet been in any free or neutral river or port, and 
makes insurance on the same, is obliged to express that circum- 
stance in the policy, for want thereof, the insurance shall be 
deemed to have no efficacy or value." Even the question of 
re-capture, that is, where a ship in her voyage happens to 
be taken by an enemy, and afterwards is re-taken by another 
ship in amity and restoration is made and she proceeds on her 
voyage, frequently involved considerations of insurance, as 
brought out in the case of Pringle vs. Hartly, decided as 
early as 1744.* 

Insurance on Trade With the Enemy. 
War in every case has the most profound and immediate 
effects on commerce, disturbing, as it does, the friendly rela- 
tions of nations and leading to prohibition of intercourse, em- 
bargo acts, etc. What constitutes a state of war is sometimes 
very difficult of exact definition, never so well illustrated as in 
the case of our own French Spoliation cases, which occurred 

Insurance Company of the State of Pennsylvania, and Bayard Henry, 
Attorney for Directors of the Insurance Company of North America," 
Washington, Government Printing Office, 1910. 

* The case of Pringle vs. Hartley is discussed in Park's " System 
of the Law of Marine Insurance," 7th Edition, Vol. I, p. 232. 

xiy 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

without a specific declaration of war against France. Insurance 
on any trade with the enemy, or insurance on prohibited goods, 
is contrary to public policy, and expressed in the principle that 
"This interdiction of commerce with enemies comprehends also 
the prohibition of insuring the effects which belong to them, 
whether they be loaded on board their own vessels, or those 
of friends, allies, or neutral subjects; for to insure the property 
of enemies, or to trade with them directly or indirectly is, in 
effect, the same thing." This principle, derived from the 
French Ordinances of commerce and marine, was not accepted 
by England in the war of 1756, when it was held that England 
"would not consider the prohibition of insurance as necessarily 
included in that of commerce," since they constantly insured 
French ships and their cargoes as in time of peace, whether 
they were destined for the French colonies, or any other ports 
of France, or those of neutral nations." This, however did not 
prevent the captured ships from being declared good prizes, 
but the result of it was, in the words of a French commentator, 
that, "one part of the nation restored, by the effect of insurance, 
what the other took away by the right of war." Naturally 
considerations of this kind include the whole subject of con- 
traband goods and the principle that free goods make free ships. 
Within more recent times the foregoing considerations have 
found their application to concrete problems arising out of the 
War of the Rebellion, the Alabama Claims, and the results of 
the war between Russia and Japan. Reference may here be 
made to the case of Richardson vs. Maine Insurance Company, 
decided in 1809, in which the American doctrine of insurance 
in its relation to commerce in war is clearly defined. The subject 
itself is one of much controversy, but for the present purpose 
it is sufficient to have brought out the very intimate relation 
which has ever existed and ever will exist between the practice 
of insurance and the carrying on of international commerce 
during a time of maritime war. 

The great work of Weskett, from which most of the imme- 
diately preceding observations and conclusions have been 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

derived, was, in 1787, followed by a treatise entitled "A State- 
ment of the Law of Marine Insurance, with Chapters on Bot- 
tomry, etc.," by Mr. James Allan Park. This work was the first 
comprehensive and systematic dissertation on the law of insur- 
ance in England, and a standard authority for many years in the 
United States. An advertisement in the American newspapers 
of the period, inviting proposals to print an American edition 
of this work, contains the statement that it was the most 
complete work on the subject and that it contained all the 
important decisions ever made in England on insurance.* 

First Systematic Treatise on Insurance Law. 

John Duer, one of the foremost American authorities on tha 
law and practice of marine insurance, writing in 1845, observed 
with reference to the work of Park, that it was entitled "to the 
praise of being the first endeavor to reduce the English law of 
insurance to the order of a regular science." The far-reaching 
influence of this work on American judicial practice is made 
evident by frequent references to this authority in cases de- 
cided in American courts. Written at a time when the law of 
insurance itself was in a much more formative state than it is 
now, the influence of Park was naturally very great. Available 
at the period when the American constitution was under con- 
sideration, and when by every authority of the day insurance 
was considered an element of commerce and an integral part 
thereof, the following remarks therefrom on the commercial 
aspects of insurance and its relation to the commercial trans- 
actions of the period are decidedly suggestive. 

" In most of the commercial countries abroad, it is partic- 
ularly expressed, either in their ordinances or policies, and 
sometimes in both, that the risk of the insurers shall commence, 
the moment the goods quit the shore, and shall continue till 
they are landed at the place of their destination "f 

♦"Account of the Early Insurance Offices in Massachusetts from 
1728 to 1801," by E. R. Hardy, Boston, 1901, p. 90. 

t Park, System of the Law of Marine Ins., 7th Ed., Vol. I, p. 28. 
121 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

"It should seem, that by the common law and usage of mer- 
chants, any person whatever might be an insurer, however 
unable he might be, from poverty, to make up the losses 
insured against, provided the merchant was weak enough to 
trust to such a security. In process of time, however, there 
were so many who made a show of great wealth, in order 
to deceive the honest and unsuspicious trader out of his 
premiums, and who were in insolvent circumstances, that it 
became an object of national concern, and parliamentary inter- 
ference. The mischiefs then existing in this branch of trade, and 
the dangerous consequences thence arising to the interests of 
the country, are to be collected from the preamble of the 
statute, which passed in the reign of George the First, to remedy 
these evils, and which has in some, though not in any great 
degree, restrained the rule of the common law as to the un- 
limited right any man or body of men had to become insurers."* 

Insurance in Naval and Commercial Jurisprudence. 
Park having, no doubt, made a careful study of the French 
ordinances of commerce and marine enacted during the reign 
of Louis XIV, under the auspices of Colbert, as minister of 
finance, refers to these codes and their authors, as follows: 
" In order to gain a proper insight into the true effects of com- 
merce upon the various nations of the world, and the advantages 
of some particular branches of trade, he procured and employed 
learned and diligent men to inquire into the commercial his- 
tories of cities long since destroyed, and the nature of the cli- 
mate, soil and productions of the countries then rising into 
notice. It was to this spirit of inquiry in this famous statesman 
[Colbert], that the world is indebted, as appears from the 
dedication, for that very masterly performance upon the commerce 
and navigation of the ancients, written by Huet, Bishop of 
Avranches and Soissons, who is justly entitled to a high rank 
among men of letters. Colbert having thus made use of the 

* 6 George I, Chap. 18. See 7th Edition, Park, " A System of the 
Law of Marine Insurances," Vol. I, p. 5. 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

labors of others in order to gain useful information, undertook 
to restore the navy and commerce of France; and he completed 
all his services by the publication of that ancient body of sea 
laws known by the name of the Ordinances of Louis XIV, 
which comprehended everything relating to naval or com- 
mercial jurisprudence; and of which the doctrine of insurances 
forms a considerable part. To its merit all Europe has borne 
testimony; and the name of Colbert must ever be mentioned 
with respect, when the Ordinances of Louis XIV are the subject 
of conversation."* 

While the work of Park became most widely known, there 
was published, however, during the same year an equally 
important treatise on the elements of law relating to insurance, 
by John Millar, of Edinburgh, which contains some very im- 
portant observations on the relation of insurance to commerce. 
As observed by this author, the progress of commercial im- 
provement has been accompanied by a corresponding extension 
of mercantile law, leading first to the regulation of navigation 
only, but at a subsequent period to the regulation of insurance 
and other maritime contracts. He remarks that "the utility 
of a contract of this nature in commercial nations is great and 
strong. The underwriter who promises to be responsible for 
the danger attending the conduct of any branch of trade 
receives a consideration proportionate to the risk he under- 
takes and, therefore, derives a reasonable profit from that 
employment of stock. On the other hand, the merchant, by 
abandoning a share of his expected gain is freed from the appre- 
hension of a loss that might be ruinous to him. The under- 
writer is thus enabled to participate in the profits of every 
different concern. He becomes a sort of temporary partner 
of the most extensive trading companies." Recognizing the im- 
portant relation of insurance to the general welfare, the author 
observes, in continuation of the preceding remarks, that "Insur- 
ance is no less advantageous to the public than to individuals 
by modifying and diffusing the profits of trade and by preventing 
* Park, System of the Law of Marine Ins., 7th Ed., Vol. I, p. xxxiv 
123 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

incidental misfortunes from operating to the ruin of individuals 
or companies of merchants which might obstruct the uniform 
progress of commerce and endanger public credit." 

Insurance in Actual Commerce. 
Outside of the field of law and legal controversies arising 
out of differences of opinions regarding the nature and effects 
of the insurance contract, there is abundant evidence in the 
every-day commercial transactions of the period and the com- 
mentaries on commercial practice, that insurance in the minds 
of merchants was never separated from the subject of com- 
merce itself. In 1788 there was published in Edinburgh an 
interesting "Introduction to Merchandise," by Robt. Hamilton, 
which includes an account of the trade of Great Britain and the 
laws and practice relating to sale, factorage, insurance, bills 
of exchange, bankruptcy, etc. Insurance is defined as "a 
contract whereby one party engages to pay the loss which 
the other may sustain for a stipulated premium or consideration. 
The most common sorts are insurance against the dangers of the 
sea, insurance against fire, insurance of debts, and insurance 
on lives." Bottomry bonds are defined as contracts partly in 
the nature of borrowing on interest and partly in the nature 
of insurance. Respondentia contracts are defined as being of 
the same kind, but secured on goods instead of the ship, the 
condition of re-payment being that the goods did not perish 
through the hazards of the sea. The observations include 
calculations of cases in actual practice, a brief discussion of 
the doctrine of chances and annuities on lives. The volume 
makes it evident that the commercial education of men at this 
early period was not considered complete without an under- 
standing of the fundamental principles of insurance, of the 
theory of insurance in all its branches, and the application of 
established principles to everyday practice, and the law of the 
subject as determined by the courts.* 

* For an interesting illustration of the place of insurance in actual 
commerce, reference may be made to "A New and Easy Method of 

124 



insurance as an element of early commerce 

The Insurance Company of North America. 

Marine insurance in America previous to the Revolution 
was exclusively a matter of individual underwriting and it 
was not until 1792 that the first association was formed 
originally with the title of the Universal Tontine, subsequently 
changed to that of the Insurance Company of North America. 
In agitating for the organization of a corporation, one of the 
promoters pointed out that his extended experience as a policy- 
holder entitled him to foresee the great possibilities of a large 
association engaging in the business of underwriting the ven- 
tures of American citizens in the growing commerce of the port 
of Philadelphia. Attention was directed to the frequency of 
defalcation on the part of individual underwriters and the 
superior value of a well-established corporation with a sufficient 
capital. Individual underwriting as it had become well-estab- 
lished in London at Lloyds' Coffee House, found its counterpart 
in America, where certainly as early as 1762 advertisements 
gave public notice of the opening in Philadelphia of an insurance 
office for insuring shipping and merchandise at the London Coffee 
House. As early as 1759, there was in New York an insurance 
office at a house adjoining the Merchants' Coffee House, where 
risks were advertised to be underwritten at moderate premiums. 
Gradually competition increased and a lowering of rates resulted 
in the underwriter's inability to meet his losses. That the 
practice of underwriting in America at this early date was quite 
extensive is made conclusively evident by the collection of manu- 
script data, including insurance books and papers, preserved 
by the Pennsylvania Historical Society, and covering under- 
writing accounts from 1768 to 1774. 

The petition in 1793 to incorporate an insurance company was 
promptly acted upon by the General Assembly of Pennsylvania 
and in a report of a special committee appointed to consider the 
matter, occurs the important and extremely suggestive statement, 

Bookkeeping; or, Instructions for a Methodical Keeping of Commer- 
cial Accounts," by Alexander Brodie, London, 1722, which gives numer- 
ous illustrations of the place of insurance in actual commerce. 

125 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

that "no commerce or navigation could be beneficially conducted 
without insurance, nobody choosing to commit considerable 
property to the ocean without guarding against the numerous 
accidents to which it would be thereby exposed." The opposition 
of private underwriters prevailed to delay favorable action, 
but a charter was finally granted after a further report had 
been made by a committee of the Legislature, which, among 
other interesting observations, states that "As it is impossible 
for a merchant with safety to hazard unprotected his property 
on so uncertain an element as water, which is so liable 
to prejudice or endanger it, it becomes essential to the farmer, 
miller, or manufacturer, that he should insure it. Insurance 
is an undertaking on the part of one or more individuals, in pro- 
portions to the sums they respectively take or subscribe, to bear 
harmless the merchants in their export trade. The cheaper 
insurance is done, the better price the farmer or manufacturer 
will obtain; for this being one of the charges in transportation 
of the surplus it must, of necessity, be understood or reckoned 
in the valuation of it." No argument in favor of the contention 
that insurance is an element of commerce and an integral part 
thereof, could be framed in more concise and convincing lan- 
guage than this plea, written in 1794, or five years after the 
adoption of the Constitution. 

The French Spoliation Cases. 
The charter establishing the Insurance Company of North 
America was granted on the first of April, 1794. From that 
date to this the history of the company has been one of the 
most honorable in the annals of American commerce and insur- 
ance. From the outset the corporation became an influential 
factor in promoting American commercial enterprise at a time 
of great peril, not only arising out of the dangers of navigation, 
but even more so out of the almost world-wide state of war. 
As the result of the war between England and France, in which 
the United States assumed a position of neutrality, enormous 
depredations were committed upon American commerce by 
126 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

French men-of-war and privateers, which the nation at that 
time was not in a position to prevent. After the close of the 
war in 1801 a settlement was made by offsetting joint liabili- 
ties on the part of France and the United States, in return 
for which the latter assumed the obligation towards its citizens 
to make ample restitution for the losses sustained as the result 
of French depredations. These claims have gone down in his- 
tory as the French Spoliation Claims, with a literature of their 
own and innumerable Congressional considerations extending 
throughout the long intervening period of time. 

The bearing which these claims have on the subject of 
insurance, which in most cases covered the ship and its cargo 
unlawfully seized, is partly made evident in the practical diffi- 
culties confronting the Insurance Company of North America, 
arising out of a state of war, which at times imperiled its 
very existence. The losses sustained by the company were 
extremely heavy and the slow communications made it impos- 
sible to estimate with accuracy the actual liabilities incurred. 
The company accordingly appointed a committee to confer 
with the Insurance Company of the State of Pennsylvania and 
private underwriters, to consider what steps were necessary to 
jointly protect their respective interests, and at a subsequent 
meeting it was decided to decline thereafter the underwriting 
of any marine risk, excepting peace risks, and upon the condi- 
tion that this action be adopted by the other insurers in Phila- 
delphia. The recommendation was not carried into effect and 
on October 8th, 1795, a committee was appointed to wait upon 
the Secretary of State, to ascertain the true state of affairs. 
On June 19th, 1798, it was agreed not to insure to French 
ports, except with a warranty against capture and seizure by 
the French. The total amount of the losses incurred by the 
company on this account were estimated at nearly two million 
dollars. One hundred and ten years have passed and these 
claims have not as yet been all disposed of. The history of the 
Insurance Company of North America, and the Insurance Com- 
pany of the State of Pennsylvania, however, very forcibly illus- 

127 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

trate the close connection existing at this early date between 
the carrying on of commerce by sea during a time of war and 
the secure protection of such commerce by insurance. 

Insurance in the Diplomatic Correspondence of the 
Revolution. 

It is not only, however, from the records of the Insurance 
Company of North America that evidence is available to prove 
the commercial aspect of insurance during the revolutionary 
period of the seventeen years following the peace of 1783. 
In the diplomatic correspondence of the Revolution are to be 
found various references to insurance and, among others, a letter 
dated August 18th, 1776, by Silas Deane, written from Paris to 
the Committee on Secret Correspondence, which contains the 
interesting statement that insurance from London to Jamaica 
was 20%. In a subsequent letter, dated October 29th, 1776, 
Deane wrote to the Committee on Secret Correspondence, also 
from Paris, that "The appearance of American cruisers in those 
seas (that is, near the coast of France) has amazed the British 
merchants and insurance will now be on the whole establish- 
ment. This will give the rival nations a great superiority in 
commerce, of which they cannot be insensible." Very much 
to the same effect is a statement in a letter from Arthur Lee, 
written from Philadelphia under date of September 9th, 1777, 
to the Committee of Foreign Affairs. After referring to the 
effect on British commerce of American cruisers, and the neces- 
sity on the part of British merchants to carry on their commerce 
with other nations in neutral bottoms, and the expedients to 
screen their merchandise in this manner, Lee remarks, "I say 
screen, because they cannot expect that, according to the law 
of nations, it will be a protection when discovered. They 
have been driven to this necessity by the number of successes 
of these (American) cruisers in and about the channel; which 
has raised insurance so high that their manufactures are in 
danger of being augmented thereby, in their price, too mnch 
for the European markets." Here, again, in language as con- 

128 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

cise as it can be expressed, the fact of insurance as an element 
of commerce is clearly emphasized as a matter of practical ex- 
perience in commercial affairs. 

A comprehensive review of insurance as an element of 
early commerce would extend far beyond the present purpose. 
As pointed out in the comments upon the work of Weskett, 
insurance is more or less an element, or factor, in all that per- 
tains to commercial development and intercourse during times 
of peace or war. The subject of French Spoliation alone fur- 
nishes a most fruitful source of information, warranting the 
conclusion that early American commerce could not have been 
carried on as it was carried on, nor could it have attained to 
the dignity of a great carrying trade if it had not been for 
marine insurance. This principle is clearly enunciated in inter- 
national law, where insurance has often figured as an essential 
element in commercial disputes arising out of international 
conflicts or misunderstandings. 

Insurance in International Arbitrations. 
John Bassett Moore in his History and Digest of Inter- 
national Arbitrations to which the United States has been a Party, 
with reference to the "French Indemnity of 1831," wrote that 

" The principal cases in which claims were held to have 
been invalidated by the claimants themselves were those in which 
there was an omission to seek the relief provided by the con- 
vention of 1800, either by failure to bring the case before the 
proper tribunal or to produce the necessary proofs, or in which 
the claimant had accepted an indemnity, though an insufficient 
one, from France; or, most numerous of all, in which the loss 
was borne by insurers. In the last case the insurer was treated 
as having acquired pro tanto an interest in the fund; but if he 
happened to be a foreigner he was held to be excluded by 
alienage, and his payment for the loss operated as 'an absolute 
relief to the fund.' " (Vol. V, p. 4481). 

The Case of the Schooner Polly. 
The bearing of these considerations, which are amplified 
in the treatise referred to, is brought out in the numerous 

129 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

cases of French Spoliations, individually considered, of which 
the following may serve as a typical illustration: The Schooner 
Polly sailed on a commercial voyage from Boston, Mass., on 
the 13th day of May, 1799, bound for Jamaica. While peace- 
fully pursuing said voyage she was seized on the high seas, on 
or about the 10th day of June following by the French Letter 
of Marque Clementine of Guadaloupe and a prize crew placed 
on board with orders to conduct said vessel to Porto Rico. 
On the next day the Polly was recaptured from the French 
by British vessels and carried to the Island of Tortola and 
condemned by the court of Vice-Admiralty held in the Road 
Town of said island, to pay a salvage of one-sixth of the gross 
value of said vessel and cargo, together with costs. There- 
after in pursuance of said decree said vessel and cargo were 
sold, the amount realized after payment of salvage and ex- 
penses being $3,546.11. The Polly was a duly registered vessel 
of the United States and was built in the year 1798 and owned 
by citizens in the United States residing in Massachusetts. 
The cargo consisted of miscellaneous merchandise and the 
losses to the owners by reason of the seizure of vessel and cargo 
were estimated at $10,875.02, of which $925.00 represented the 
premium paid for insurance. Deducting from this sum the 
$3,546.11 received from the sale of the vessel after paying 
salvage and costs, and the insurance received from the insuring 
underwriters, amounting to $4,794.45, the net loss to the owners 
of ship and cargo was, therefore, $2,534.46. The policy of 
insurance was an underwriter's contract in return for a pre- 
mium of 10%. The chief loss, therefore, fell upon the insurers, 
claim having been brought under the French Spoliation Act 
of 1885 by the heirs of the persons who suffered loss through 
the capture of the Polly and it having been specifically stat9d 
in the claim that the claimants in their respective capacity 
as owners of said claim disavowed any claims on account of 
insurance paid. The decision of the Court, filed on March 
31st, 1902, was that "The Court decides as conclusions of law 
that it does not appear that the said seizure was illegal and 
130 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

that the owners and insurers had no valid claim for indemnity 
therefor upon the French government prior to the ratification 
of the contention between the United States and the French 
Republic, concluded on the 30th day of September, 1800, and 
that the claimants are not entitled to recover from the 
United States." 

Insurance as an Element of Ancient and 
Modern Commerce. 

Cases like the foregoing clearly illustrate the commercial 
aspects of insurance, particularly in a time of war. It is abso- 
lutely certain that without insurance such commerce as is 
represented by cases of this kind would not have been carried 
on at all, in that no considerations of profit to be earned on 
sales to be made would be sufficiently attractive to balance 
the enormous risk incurred by the perils of the sea and pos- 
sible capture by the enemy. In consideration of a moderate 
premium of only 10% this particular transaction was under- 
taken as a matter of commerce and the insurance considera- 
tion constitutes, therefore, an essential element of the transac- 
tion as a whole. What is true of the commerce in time of war 
at the end of the eighteenth century is equally true of commerce 
on an extensive scale throughout the whole recorded period 
since insurance first was introduced in the form of bottomry 
loans during the times of the Rhodians. What is true of 
insurance as an element of commerce during the revolutionary 
war and the depredations upon American commerce during 
the war between England and France, is equally true of insur- 
ance as an element of commerce throughout the whole subse- 
quent history of commercial development. In fact, the diffi- 
culty of establishing this contention is not the paucity but 
rather the preponderating mass of material, consisting of 
commercial documents, commercial transactions, treaties, nego- 
tiations, and even considerations of values and drawbacks, fees 
and bills of lading, as well as commercial credit in every form 
as it has been perfected within modern times. When, there- 

131 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

fore, Alexander Hamilton, in 1791 included policies of insur- 
ance as matters of commerce which might be regulated by 
the Federal government, he spoke with a perfect knowledge 
of the standard authorities of the day on both commerce and 
insurance.* That Hamilton was fully familiar with these works 
is made evident by the fact that in his pay-book, which he kept 
as Commander of the State Company of Artillery (1776), there 
are numerous notes concerning the books which made up his 
library, and among these he mentions Lex Mercatoria, Ralt's 
Dictionary of Trade and Commerce, Postlethwayt, and Dr. 
Halley's Table of Observations, including comments by himself. 
The modern mind, no doubt, yields itself with great reluctance 
to a painstaking inquiry of this kind, but it is no less a duty 
to establish the truth in a matter of business history and 
methods than in the numerous and much more conflicting and 

* Hamilton's Official Opinion as Secretary of the Treasury on the 
Constitutionality of a United States Bank has been reprinted in full 
in " Legal Masterpieces," edited by vanVechten Veeder, Vol. I, St. 
Paul, Minn., p. 214, et seq. The qualifications of Hamilton as a lawyer 
familiar with the subject of insurance are concisely set forth in the fol- 
lowing passage in Kent's " Commentaries on American Law": " Mari- 
time law in these states became early and anxiously an object of pro- 
fessional research. It we take the reports of New York in chronological 
order, we shall find that the first five volumes occupy the period when 
Alexander Hamilton was a leading advocate at our bar. That accom- 
plished lawyer (for it is in that character only that I am now permitted 
to refer to him) showed, by his precepts and practice, the value to be 
placed on the decisions of Lord Mansfield. He was well acquainted 
with the productions of Valin and Emerigon ; and if he be not truly one 
of the founders of the commercial law of this state he may at least be 
considered as among the earliest of those jurists who recommended 
those authors to the notice of the profession, and rendered the study 
and citation of them popular and familiar. His arguments on commer- 
cial as well as on other questions were remarkable for freedom and 
energy; and he was eminently distinguished for completely exhausting 
every subject which he discussed, and leaving no argument or objection 
on the adverse side unnoticed and unanswered. He traced doctrines to 
their source, or probed them to their foundations, and at the same time 
paid the highest deference and respect to sound authority." 

14th Ed., Vol. 3, p. ai. 
132 



INSURANCE AS AN ELEMENT OP EARLY COMMERCE 

far less practical matters of historical research for its own sake. 
For this reason, and in behalf of the truth of history, these facts 
have here been brought together from authentic sources of the 
highest rank, to establish beyond controversy the fact that in 
the commerce and commercial intercourse preceding the adoption 
of the American constitution insurance was held to be an element 
of commerce, an instrumentality thereof and an all-important 
part, without which such commerce or commercial intercourse 
and subsequent commercial development would not have been 
possible. There is nothing in the subsequent history of a hun- 
dred and twenty years of American and international commerce 
to disprove the contention that insurance holds to-day, as in 
the past, an important place in commercial enterprize and 
that it is, in theory and in fact, an essential element and instru- 
mentality thereof. 

LIST OF REFERENCES. 

1622 Stracchae, Benuvenuti and others; De Mercatura decisiones 
et tractatus varii, et de rebus ad earn pertinentibus : In quibus 
omnium Authorum, praecipue Benuvenuti Stracchae, Iuris- 
consulti Clarissimi: Qui de Mercatura, Cambijs, Sponsionibus, 
Creditoribus, Fideiussoribus, Debitoribus, Decoctoribus, Naui- 
bus, Nauigatione, Assecurationibus, Subhastationibus, alijs 
de negotiis Mercatorum, scripsere, Tractatus libris continentur; 
turn eorum etiam quae in Prazim quotidianam possunt his 
de rebus occurrere materies explicatur. Venice. 

1682 Merchant, S. M. ; Debtor and Creditor made easy: or, a short 
instruction for the attaining the right use of accounts. London. 

1702 DeWitt, John, and "other great men in Holland;" The True 
Interest and Political Maxims of the Republic of Holland and 
West-Friesland. London. 

1 71 7 Puffendorf, Baron; Of the Law of Nature and Nations. Done 
into English by Basil Kennett, D. D. London. 

1722 Brodie, Alexander; A new and easy method of Bookkeeping. 
The Second Waste-Book, containing factorage and company 
accompts. Insurance accounts, p. 6. London. 

1740 Ashley, John; Memoirs and considerations concerning the trade 
and revenues of the British Colonies in America. Amount of 
insurance charges on shipping, pp. 98 et seq. London. 

1744 Jacob, Giles; New Law Dictionary. London. 

133 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

1 751 Postlethwayt, Malachy; The Universal Dictionary of Trade and 

Commerce. Translation from M. Savary, 2 vols. London. 

1752 Beawes, Wyndham; Lex Mercatoria Rediviva : or, The Mer- 

chant's Directory. Insurance, pp. 261 et seq. London. 
1769 Molloy, Charles, De Jure Maritimo et Navali: or a treatise of affairs 

maritime, and of commerce, 2 vols. London. 
1 781 Weskett, John; A Complete Digest of the Theory, Laws, and 

Practice of Insurance. London. 
1783 Emerigon, M. Balthazard-Marie; Traite des Assurances et des 

Contra ts a la grosse. Marseille. 2 vols. 

1787 Anderson; An historical and chronological deduction of the 

Origin of Commerce, from the earliest accounts. Containing 
a history of the great commercial interests of the British Em- 
pire. In four volumes. London. 

1788 Hamilton, Robert; An Introduction to Merchandise. Second 

edition, corrected and revised. Edinburgh. 
1788 A General Treatise of Naval Trade and Commerce. London. 

2 vols. 
1799 Moore, John Hamilton; The New Practical Navigator; being an 

epitome of navigation, etc. Marine insurance, pp. 507 et 

seq. Newburyport. 

1802 Caines, Geo.; An Enquiry into the Law Merchant of the United 

States; or, Lex Mercatoria Americana, on several heads of 
commercial importance. Insurance, pp. 254-354. New York. 

1803 Harris, Thaddeus M.; The Minor Encyclopedia, or Cabinet of 

General Knowledge: Being a dictionary of Arts, Sciences, 
and Polite Literature. Insurance, Vol. 3, pp. 195 et seq. 4 
vols. Boston. 

1804 Montefiore, Joshua; A Commercial Dictionary: Containing the 

present state of mercantile law, practice and custom. Insur- 
ance, Vol. 2, pp. 391 et seq. 3 vols. Philadelphia. 

1805 Dubost, Christopher; The Elements of Commerce. 2 vols. 

London. 

1806 Azuni, M. D. A. ; The Maritime Law of Europe. 2 vols. New York. 

1807 Oddy, J. Jepson; European Commerce, shewing new and secure 

channels of trade with the continent of Europe. Insurance, 
Vol. 1, pp. 171, 174, 175, 272. Vol. 2, p. 105. 2 vols. Phila- 
delphia . 

1 810 Marshall, Samuel; A Treatise on the Law of Insurance. 2 vols. 

Philadelphia. 

181 1 Montefiore, J.; The American Trader's Compendium; containing 

the laws, customs, and regulations of the United States rela- 
tive to commerce. Insurance, p. 181. Philadelphia. 

134 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

1811 Hall, John E.; An essay on maritime loans, from the French of 
M. Balthazard Marie Emerigon. Baltimore. 

1814 Letter from the Secretary of the Treasury transmitting a state- 
ment containing the information in relation to the incorporated 
banks and insurance companies within the District of Colum- 
b ia . Wa shington . 

1 81 7 Park, James Allan; A system of the Law of Marine insurances. 

With three chapters, on bottomry, on insurances on lives, on 
insurances against fire. Seventh edition. 2 vols. London. 

1 81 8 Gilleland, J. C. ; The Counting-house assistant, or a brief digest 

of American Mercantile Law. Insurance and maritime law, 
pp. 39 et seq. Pittsburgh. 

1825 Dupin, Baron; The Commercial Power of Great Britain; exhib- 

iting a complete view of the public works of this country. 2 
vols. London. 

1826 Taylor, Robert B.; Argument in support of the Memorial of the 

Marine Insurance Companies of Baltimore, to the Congress of 
the United States, praying compensation for losses sustained 
under the treaty with Spain of the 22nd February, 181 9. Norfolk. 

1830 Falconer, William; A New and Universal Dictionary of the Marine. 

London. 

1 83 1 Bennett, James; The American System of Practical Bookkeeping, 

adapted to the Commerce of the United States, in its domestic 
and foreign relations. Insurance accounts, pp. xix, 7, 10, 14. 
New York. 

1832 Blunt, Joseph; The Merchant's and Shipmaster's Assistant; 

containing information useful to the American Merchants, 
Owners, and Masters of Ships. Marine Assurances, pp. 79- 
114. New York. 

1833 Reuss, W. F. ; Calculations and Statements relative to the trade 

between Great Britain and the United States of America. 

Insurance, p. 107. London. 
1836 Tomlins, Sir Thomas Edlyne; The Law Dictionary, explaining 

the rise, progress, and present state of the British law. 3 

vols. Philadelphia. 
1838 Clarke, Francis G. ; The American Ship-master's Guide, and 

Commercial Assistant. Marine insurance, pp. 307 et seq. 

Boston. 

1844 Craik, George L. ; The History of British Commerce, from the 

earliest times. 3 vols. London. 

1845 Duer, John, LL. D.; The Law and Practice of Marine Insurance, 

deduced from a critical examination of the adjudged cases 
etc. New York. 

135 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

1846 Waterston, William; A Cyclopaedia of Commerce, Mercantile 
Law, Finance, Commercial Geography, and Navigation. New- 
edition by J. R. McCulloch. London. 

1846 Shattuck, Lemuel; Census of Boston for the year 1845. State- 
ment of insurance companies, Appendix HH, p. 58. 

1846 Harris, Nicholas; A Complete System of Practical Bookkeeping. 
Hartford. 

1846 Beckmann, John; A history of inventions, discoveries, and origins. 

Translated from the German by William Johnston. Fourth edi- 
tion, revised and enlarged by William Francis and J. W. Griffith, 
2 vols. Chapter on Insurance Vol. 1, pp. 234 to 244. London. 

1847 Gilbart, J. W.; Lectures on the History and Principles of Ancient 

Commerce. Insurance, pp. 224 et seq. London. 
1849 Dawson, J. L. t M. D. and H. W. DeSaussure, M. D. ; Census of 
the City of Charleston, South Carolina, for the year 1848. 
Insurance officers, p. 33. Mortality tables, pp. 214 et seq. 
Charleston. 

1849 Tate, William; The Counting House Guide to the higher branches 

of Calculations. Marine insurance, pp. 42-55. London. 

1850 MacGregor, John; Commercial Statistics. 5 vols. London. 

Vol. 3, p. 78, insurance companies in Massachusetts; p. 180, 
marine insurance premiums in New York. 

185 1 McCulloch, J. R.; A Dictionary, Practical, Theoretical, and His- 

torical, of the Commerce and Commercial Navigation. Marine 
insurance, Vol. 1, p. 615 et seq. Insurance, Vol. 2, pp. 69-96. 
2 vols. Philadelphia. 

1852 Freedley, Edwin T.; A Practical Treatise on Business; or how to 

get, save, spend, give, lend, and bequeath money. Insurance, 
pp. 1 2 5-13 1. Philadelphia. 

1853 Greg, William R.; Essays on Political and Social Science. Vol. 

1, p. 402 et seq. 2 vols. London. 

1854 Levi, Leone; Manual of the Mercantile Law of Great Britain and 

Ireland. Insurance, pp. 135, 174, 193. London. 

1855 Smith, John William; A Compendium of Mercantile Law. Third 

edition enlarged and revised by James P. Holcombe and Wil- 
liam Y. Gholson. Insurance, p. 410 et seq. New York. 

1855 Butts, I. R.; U. S. Law Cabinet, comprising the Business Man's 

Assistant and Ready Reckoner. The Merchant Shipper's 
Assistant, or Common Carriers' Guide. Marine insurance, 
pp. 54-88. Boston. 

1856 Parsons, Theophilus, LL. D. ; The Elements of Mercantile Law. 

Insurance: marine, pp. 403-487; fire, pp. 488-539; life, p. 540 
et seq. Boston. 

136 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

1856 Tecklenborg, H.; Handlexikon fur Rheder, Versicherer und 

Schiffscapitaine. Bremen. 
1856 Insurance Commissioners of Massachusetts, First Annual Report. 

Boston. 

1856 Sharswood, George; Popular lectures on Commercial Law. Marine 

insurance, p. 211 et seq. Philadelphia. 

1857 Insurance Commissioners of Massachusetts, Second Annual Report 

of. Boston. 
1857 Benton, Thos. H.; Abridgment of the Debates of Congress, from 
1789 to 1856. 16 vols. New York. 

1857 Coode, George; Report to the Chancellor of the Exchequer on 

Fire Insurance Duties. London. 

1858 Homans, J. Smith; A Cyclopedia of Commerce and Commercial 

Navigation. Insurance, pp. 103 7-1066. New York. 

1859 Street, Alfred B.; The Council of Revision of the State of New 

York, its history, a history of the courts with which its mem- 
bers were connected; biographical sketches of its members; 
and its vetoes. Insurance, pp. 345-347. Albany. 
i860 Bateman, William O. ; The General Commercial Law, as recognized 
in the jurisprudence of the United States. Insurance, p. 986 
et seq. Philadelphia. 

1863 Upton, Francis H.; The Law of Nations affecting commerce 

during war. Third edition. New York. 

1864 Statistics of the Foreign and Domestic Commerce of the United 

States, communicated by the Secretary of the Treasury. In- 
surance, p. 184. Washington. 

1864 Hansard's Debates. Alabama Claims, pp. 429, 467, 498, 544, 

618, 714, 956, 1053, x 462, 1476, 1544, 1595. *77 8 - 

1865 Proceedings of the Commercial Convention, held in Detroit, 

July n-14, 1865. Insurance charges, pp. 210 and an. Detroit. 

1865 Hamon, Henry; New York Stock Exchange Manual. Insurance 

stocks, p. 387 et seq. New York. 

1866 Mayhew, Ira; Practical Bookkeeping. Insurance, p. 140. Boston. 
1866 Weller, Louis; Calculations and tables of equivalents at various 

rates of exchange of exports and imports of Great Britain, etc. 
Calculations of marine and fire insurance, p. 402 et seq. 2 
vols. Liverpool. 

1 87 1 Townsend, Calvin; A Compendium of Commercial Law. Insur- 
ance: marine, pp. 434-462; fire, pp. 463-476; life, pp. 477- 
488. New York. 

1871 Beaman, Charles C. Jr.; The National and Private "Alabama 
Claims " and their " final and amicable settlement " (including 
table of marine insurance war rates, etc.) Washington. 

137 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

1873 Moore, Charles B.; The Geneva Award. Insurance Claims and 
Especially the Claims of Mutual Insurance Companies. New York, 

1875 Ward, J. Langdon; A Reprint of some of the Speeches on the 

Distribution of the Geneva Award, First Session, XLIII Con- 
gress. New York. 

1876 Lindsay, W. S. ; History of Merchant Shipping and Ancient 

Commerce. 4 vols. London. 
1884 Lechartier, E. ; Dictionnaire Pratique des Assurances Terrestres. 

Paris. 
1888 Putzel, Charles, and H. A. Bahr; Commercial Precedents selected 

from the column of replies and decisions of the New York 

Journal of Commerce. Hartford. 
1 891 Lioy, Diodato; The Philosophy of Right with special reference 

to the principles and development of law. Translated by W. 

Hastie. Insurance, Vol. 1, p. 286. 2 vols. London. 
1896 Kent, James; Commentaries on American Law. Fourteenth 

edition, edited by John M. Gould, Ph. D. 4 vols. Boston. 

(Insurance, Vol. 3.) 
1898 Spencer, Edward W. ; A Manual of Commercial Law. Insur- 
ance, pp. 491-501. Indianapolis and Kansas City. 
1 90 1 Grotius, The Rights of War and Peace, including the Law of 

Nature and of Nations, translated by A. C. Campbell, A. M. 

Insurance, p. 156 et seq. Universal Classics Library, Wash- 
ington and London. 
1901 Wambaugh, Eugene, LL. D. ; A Selection of Cases on Insurance. 

Cambridge. 

1901 Insurance Library Association, Boston; An account of the early 

insurance offices in Massachusetts, from 1724 to 1801. Boston. 

1902 Plass, F. ; Geschichte der Assecuranz und der Hanseatischen 

Seeversicherungs-B5rsen, Hamburg, Bremen, Lubeck. Hamburg. 

1904 Compilation of the Treaties in Force. Prepared under resolution 

of the Senate, of February 11, 1904, pp. 403, 461, 583, 655. 
Washington. 

1905 Davis, John P., Ph. D.; Corporations. A study of the origin 

and development of great business combinations and of their 
relation to the authority of the state. Gilds, Vol. 1, p. 130 
et seq. Insurance companies, Vol. 2, p. 259. 2 vols. New York. 

1905 Meili, F. ; International Civil and Commercial Law as founded 

upon theory, legislation, and practice. Translated by Arthur 
K. Kuhn, A. M. Insurance, pp. 443, 448, 473, 525 et seq. 
New York. 

1906 Slater, J. A.; The Commercial Law of England. Insurance, pp. 

I 43 _I 53- Pitman's Commercial Series. London. 

138 



INSURANCE AS AN ELEMENT OF EARLY COMMERCE 

1907 Atherley-Jones, L. A., and Hugh H. L. Bellot; Commerce in 
War. Insurance, pp. 414-416 and 587. New York. 
' 1908 Report by the Committee on a National Guarantee for the War 
Risks of Shipping to the Lords Commissioners of His Majesty's 
Treasury. (Cd. 4 161.) London. 

1909 Hotchkiss, William H., Superintendent of Insurance, New York; 

Report on Town and County Co-operative Fire Insurance 
Associations of New York State. Albany. 

1910 Malloy, William M.; Treaties, Conventions, International Acts, 

Protocols and Agreements between the United States of Amer- 
ica and other powers, 1 776-1909. Washington. 2 vols. 

1910 Scattergood, J. Henry, President of the Insurance Company of 
the State of Pennsylvania, and Bayard, Henry, Atty. for direc- 
tors Ins. Co. of North America; Statements before Committee 
on Claims of the House of Representatives on House Bill 22534. 
61st Congress, 2nd Session, March 30, 1910. The French 
Spoliation Claims, with special reference to Insurance com- 
panies. Washington. 

1 910 International Convention relative to certain Restrictions on the 
Exercise of the Right of Capture in Maritime War. Signed 
at The Hague, October 18, 1907. Treaty Series No. 14. (Cd. 
51 18.) London. 

1 9 10 International Convention relative to the Status of Enemy Mer- 
chant-Ships at the Outbreak of Hostilities. Signed at The 
Hague, October 18, 1907. Treaty Series No. 10. (Cd. 5031.) 
London. 



139 



CHAPTER IV 

THE ORIGIN AND GROWTH OF LAW AND LEGIS- 
LATION ON INSURANCE. 

Insurance, in all its branches, is today an indispensable 
element of social and economic security and progress. The 
business, within the last half-century, has attained to such 
enormous proportions that its effective supervision and control 
has become a matter of serious government concern throughout 
the world. It requires no extended inquiry into the underlying 
principles of insurance to establish the fact that while insurance 
policies are, like ordinary contracts, enforcible at law, they have 
the essential characteristic that the subject matter, or a material 
part of it, "is within the peculiar knowledge of one of the par- 
ties" and that "the other party must rely to a considerable 
extent upon the statements made by him." * The fundamental 
principle which governs in modern conceptions of State super- 
vision and control of insurance transactions was laid down by 
the Select Committee of the House of Commons on Assurance 
Associations, made to Parliament in 1853. It was said in this 
report that 

" On the one hand, even admitting the general wisdom of 
the principle of non-interference on the part of the Government 
in matters of trade, it has been contended that the question 
of life insurance differs so materially in its general character from 
ordinary trading transactions, that it may fairly be considered 
as an exception to that rule. This exceptional treatment has 
been justified and supported, on the ground that the obligations 
undertaken by such associations have reference to a very remote 
and uncertain period; that the object which persons have in 
view in effecting insurances upon their lives, is generally of an 

* Principles of Contract, by R. M. Benjamin, 1889, p. 72. 
140 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

important and solemn character, viz., the provision for widows 
and orphans after the death of their natural protectors; that, 
unlike any other transaction of trade, a contract once entered 
into cannot be discharged or abandoned, if doubts of the sta- 
bility of an office should arise, without a great sacrifice of pre- 
miums paid in past years, and the necessity of effecting new 
policies in other offices at increased rates of premium, owing to 
the greater age of the assured; and that in the present state 
of uncertainty which arises from the imperfect knowledge as 
to the real condition of assurance offices, persons are thus 
placed in the anxious and unhappy dilemma of being com- 
pelled to persevere in paying premiums from year to year, 
with some suspicion and doubt as to the ultimate advantage 
of doing so, or of incurring the serious loss which, under the 
most favorable circumstances, must attend the abandonment 
or sale of a policy. On these conditions, as a special case, it 
has been contended by different witnesses of great experience, 
that interference on the part of the Government is not only 
justifiable, but a matter of high duty, for the protection and 
information of the public." 

While it may be contended to the contrary, that the 
business of insurance forms no exception to ordinary trading 
transactions, the foregoing view has prevailed, and rightly so, 
in the public regulation of the business by the several states 
in the United States and by the supreme authority of other 
governments throughout the world. 

Exceptional Nature of Insurance Contracts. 
Insurance contracts are properly held to be of a fiduciary 
nature and they are in law said to be uberrimae fidei or 
agreements of the most perfect good faith. In contracts or 
agreements of this nature it is assumed as a first consideration 
that nothing is concealed and particularly in insurance it is a 
principle of law that "the insured must preserve the most per- 
fect good faith toward the insurer." The contractual relations 
of the parties in insurance involve the highest considerations 
of public policy and these from the earliest times have war- 
ranted or justified a more or less drastic degree of governmental 
supervision, interference and control. The ultimate fulfillment 

141 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

of deferred pecuniary obligations of this kind demands at the 
outset some evidence of financial responsibility in the assump- 
tion of a risk and at least a reasonable certainty of faithful 
stewardship of the funds accumulated for the security of the 
insured. Since insurance, as the term is now understood, 
originated in the practice of individual underwriting, or the 
assumption of maritime risk on the part of financially respon- 
sible individuals, the earlier and more primitive practice led 
frequently to disputes at law and to the serious disappointment 
of the insured as the result of financial irresponsibility of the 
insurers. The practice of insurance, particularly in early times 
and especially in the marine branch of the business, also offered 
peculiar opportunities for fraud and even crime, which accounts 
for the deliberate interference of government, almost from the 
time of the inception of the insurance contract, in determining 
the contractual relations of parties, as well as the nature, func- 
tion and purpose of the contract itself.* 

Long before the insurance contract, as now in use, had 
been perfected to a degree of practical utility in the further- 

* In connection with an historical inquiry into the commercial law of 
the ancient Hebrews, the following expression of law concerning insur- 
ance as an element of mercantile progress was discovered in the Babylo- 
nian Talmud, published about 500 A. D., by one of the contributors 
to the Jewish Encyclopaedia: 

" Our Sages have taught: When a ship goes upon the sea and a 
squall strikes her, and, in order to lighten her, they throw some of the 
cargo overboard, they make their calculation not according to the money 
value, but according to the weight of the different goods, and they 
should not depart from the custom of skippers; and skippers have the 
right to contract, that whosoever vessel is lost, they will find him a new 
vessel; but if it be lost through his fault, they do not find another vessel 
for him, nor if he deviates into a course on which it is not customary 
for vessels to go." 

The Babylonian Talmud is a current discussion about the Mishna, a 
compilation made by the Patriarch Rabbi Jehudah in North Palestine 
about 210 or 220 A. D., of the traditional or " Oral Law" as taught 
in Palestine down to his time. 

The foregoing was contributed in a letter to the New York Evening 
Post, Oct. 5, 1902, by L. N. D. 

142 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

ance of merchant adventures, a somewhat similar form of 
contract, known as bottomry loans and respondentia bonds, had 
been in use, from time out of mind, among the trading nations 
of antiquity. Bottomry bonds are in the nature of a mort- 
gage, by which the owner of a ship, or the master as his agent, 
borrows money for the use of the ship, or for a specified voyage, 
or for a definite period, and he pledges the ship, or the keel, 
or bottom of the ship, as a security for its repayment, with 
maritime or extraordinary interest, on account of the marine 
risk to be borne by the lender, it being stipulated in contracts 
of this kind that if the ship be lost in the course of a specified 
voyage, or during a limited time, by any of the perils enumer- 
ated in the contract, the lender shall also lose his money. Be- 
cause of the great risk incurred in contracts of this nature, 
absolutely essential and indispensable to the furtherance of 
commerce by sea in early times, the rate of interest allowed 
was considerably in excess of the legal rates of interest, sub- 
ject later to the limitations of the usury law. 

Papal Decree Prohibiting Bottomry Loans. 

On this account, bottomry loans came into conflict with 
the usury laws of the Catholic Church and as early as 1227 
A. D. there is record of a papal decree prohibiting bottomry 
loans, as contrary to the principles of the canon law. Since 
bottomry loans are strictly within the definition of insurance 
contracts, this decree may be accepted as the first authentic 
instance of government interference and regulation of insurance 
contracts. The view, however, which the early ecclesiastical 
authorities assumed in this matter was opposed to commercial 
practice and usage, for it was held that "bottomry is not a 
communication for the loan of money, but a partnership for 
the honest intention of seeking a livelihood by trade," and 
that, therefore, "no contract is usurious where the lender runs 
the hazard of losing all his money, both principal and interest, 

143 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

as in the case of bottomry." * Bottomry bonds are of very 
limited utility today, but other forms of insurance contracts 
have become universal instrumentalities of social and commer- 
cial progress throughout the world. The principle established 
in prohibiting by papal decree the issuance of insurance con- 
tracts, considered contrary to public policy, is fundamentally 
the same which underlies all subsequent laws and legislation 
affecting the business of insurance. Unfortunately, the early 
history of insurance is shrouded in much mystery and only 
fragmentary accounts and records now remain. The documen- 
tary proof of early insurance contracts has only been preserved 
in a few isolated instances and the ancient laws and ordinances 
are not extant in their completeness, nor do they seem to have 
been subjected to a thorough critical examination by qualified 
experts familiar with insurance terms and usages which, nat- 
urally, during the long intervening period have undergone ma- 
terial and even quite radical changes. 

Early Laws and Ordinances. 

The history of insurance, in fact, cannot be read apart 
and distinct from the history of commerce and navigation, nor, 
in fact, from the history of the legal and economic progress of 
civilized nations during ancient and modern times. Laws and 
ordinances of the fourteenth and fifteenth centuries, for illus- 
tration, which have reference to the insurance contract and 
which constitute an early though primitive attempt at govern- 
ment regulation, are difficult of exact interpretation from 
modern standpoints, as to the responsibility of government 
in its Nation to insurance interests.! The fact must never 
be lost sight of, that the practice of individual underwriting 
was not replaced by corporate underwriting until the begin- 
ning of the eighteenth century and that, therefore, early statu- 
tory requirements have reference rather to the conduct of 

* Blydenburgh on Usury, p. 33. See also Blackstone's Commentaries, 
Book II, Chap. XXX; and Fowler's History of Insurance, p. viii, note. 
tin this connection see Martin's History of Lloyds, p. 37, et seq. 

144 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

individuals than to business undertakings, such as are typical 
of our insurance companies today. The early Florentine statute, 
for illustration, which has been preserved* and in which there 
is an attempt to regulate or define the insurance contract by 
law, is not necessarily the first effort in this direction, but it 
is suggestive that at the beginning of the fourteenth century 
the business of insurance had attained to sufficient proportions 
to attract the attention of government and lead to restrictive 
regulating enactments, more or less of an interference with the 
freedom of contract and the unrestrained development of busi- 
ness enterprise. 

Chambers op Insurances. 

As early as 13 10 there was a Chamber of Insurances es- 
tablished by the Count of Flanders, at Bruges at the request 
of the merchants of that city. Chambers of insurances were 
more or less in the nature of societies or assemblies of mer- 
chants, traders, bankers and others, carrying on the business 
of insurance, acting under conditional government authority, or 
having the sanction of the proper authorities, for, as observed by 
Weskett, since undertakings of this kind "were not authorized 
by the King's Letters Patent, they had but little credit and 
their policies were neither many nor for considerable sums." f 

Ordinances of Barcelona. 

In the year 1367 King Ferdinand of Portugal decreed an 
ordinance on insurance, which takes rank as one of the very 
earliest efforts at government regulation, followed nearly seventy 
years later by the enactment of the five famous ordinances of 
Barcelona, passed in the year 1435. The distinctive feature 
of these and numerous subsequent ordinances is the under- 
lying principle of government control over the terms and uses 

* The marine policy established by the Statute of Florence, dated 
Jan. 28, 1523, has been re-printed in full in a Treatise on the Law of 
Insurance, by Geo. Richards, 3rd Ed., New York, 1909, p. 766. 

t John Weskett, Theory, Laws and Practice of Insurance, London, 
1781, p. 89. 

145 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

of the insurance contract, which may be said to underlie all 
modern legislation, except, of course, that the principle of 
public control has been enormously extended, co-incident with 
the corresponding growth of the business. It is significant, 
however, that even at a period when the actual extent of insur- 
ance transactions must have been quite limited, public ordi- 
nances more or less regulating the issue of insurance contracts 
and their official registration for authentication, should have 
been found necessary. It is maintained by Reatz, a German 
writer on insurance, that the Ordinance of King Ferdinand 
of Portugal was really for the purpose of establishing a com- 
pulsory insurance association upon the principle of mutuality. 
All of these early efforts, of course, have reference only to the 
business of marine insurance, since life, fire, or other forms of 
insurance were at that time practically unknown." * 

Early Records of Insurance Transactions. 

The business of individual underwriting was at this time 
almost exclusively confined to the seaport towns, which accounts 
for the fact that insurance or cognate subjects are usually in- 
cluded within the provisions of the ancient codes of maritime 
commerce or the sea laws. Such inclusion, of course, arises out of 
the necessity of jettison and the resulting practice of contribu- 
tion out of which the principles of average and marine insurance 
were developed in the course of time. Although the business of 
insurance was of comparatively limited extent, there are records 
to prove that as early as 1370 there were numerous insurance 
contracts in the nature of individual underwriting in force 
between the merchants of Genoa, Italy, and Bruges, in the 
Netherlands, while there is a record of 1399 proving that during 
the short period of August to September a notary of Genoa 
certified to not less than eighty contracts of insurance. At 
this early date it was the practice in marine insurance that the 

* For an admirable and learned discussion of the antiquity of insur- 
ance practice, law and custom see Plass, Geschichte der Assecuranz und 
der hanseatischen, Seeversicherungs-Borsen Hamburg, 1902. 

146 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

premium was not to be paid until the voyage was completed, 
which in part accounts for the not inconsiderable amount of 
litigation and the apparent necessity of government interfer- 
ence upon grounds of public policy. 

The Beginning of Government Control of Insurance. 

These references to the antiquity of insurance are sufficient 
for the present purpose, to emphasize the fact that govern- 
ment interest in insurance transactions has been practically 
co-incident with the inception of insurance and that the prin- 
ciple itself has been developed and perfected with the develop- 
ment and perfection of the insurance contract to its present 
form. Among other illustrations of the more or less drastic 
interference of government in matters of insurance, reference 
may be made to an edict issued by Count Philip of Burgundy, 
in 1458, confirming the then existing law of insurance and 
prohibiting the citizens of his principality to act contrary in all 
matters of insurance to the judgment and arbitration of the 
law of Flanders. Abuses in the practice of insurance were, no 
doubt, the chief cause of government interference, including, 
of course, the frequent disputes between the contracting parties 
under the then extensively prevailing practice of individual 
underwriting, which brought many cases into court for settle- 
ment or arbitration. There is record of an ordinance of Philip 
II of Spain, then the oppressor of the Netherlands, dated Octo- 
ber 31st, 1563, which calls attention to the great practical 
value of insurance as an aid to commerce, but which also makes 
reference to the numerous complaints which had been made 
against abuses in insurance matters and which made it desirable 
that thereafter the Exchange of Antwerp should adopt a stan- 
dard form of insurance policy, the use of which was subsequently 
made compulsory. A copy has been kept of the first policy 
form used in the city of Hamburg, which shows that the rules 
of Antwerp of 1563 were adopted by other European commer- 
cial nations. It is, therefore, a matter of indisputable historic 

147 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

record that a standard policy form of marine insurance was 
enacted in the Netherlands as early as 1563.* 

It was only a few years later, in 1568, when the notorious 
Duke of Alba, as Administrator of The Netherlands, issued 
an ordinance prohibiting absolutely all marine insurances and 
declaring all contracts of this character null and void. The 
great loss sustained by shipping and commerce as a result of 
this act brought about a material modification of the decree 
in 1570 and the adoption of a completely revised ordinance 
in 1 57 1, which again made the practice legal and much the 
same as it had been theretofore. One of the unforeseen results 
of the prohibitory ordinance of 1568 was the transference of 
the seat of the chief center of individual underwriting from 
Bruges to Hamburg, which has maintained to the present day, 
its place of preeminence in this respect among the cities of 
the Continent of Europe. 

Insurance as a Branch of Admiralty Law. 

The increasing amount of insurance litigation brought about 
the necessity of special consideration and in the free city of 
Hamburg a branch of the Admiralty was established as a Court 
of First Instance, to deal with cases of this kind. This in- 
clusion of insurance contracts as within the scope of admiralty 
jurisdiction is an extremely interesting and suggestive fact 
in the historical development of insurance. In marked contrast, 
the English practice has, on the whole, been adverse to the recog- 
nition of insurance contracts as within the scope of admiralty 
jurisdiction, since they were contracts made on land, even though 
for the exclusive purpose of protecting property while at sea. 
The Supreme Court of the United States, however, in the case of 
Insurance Company vs. Dunham, decided in 1870, laid down 
the important principle that English admiralty practice regard- 
ing insurance contracts could not be accepted and that the 
narrow view regarding this, as well as other admiralty matters, 

* See Martin's History of Lloyds, p. 27. 
148 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

could not be accepted by the Court as the law of the land. It 
was said on that occasion, and the remarks have a broader 
meaning than is at first apparent on superficial reading, that, 
" This Court has frequently declared and decided that the 
admiralty and maritime jurisdiction of the United States is 
not limited either by the restraining statutes or the judicial 
prohibitions of England, but is to be interpreted by a more 
enlarged view of its essential nature and objects, and with ref- 
erence to analogous jurisdictions in other countries constituting 
the maritime commercial world, as well as to that of England."* 
It was, therefore, decided by the Court that the contract of 
marine insurance was a maritime contract and within the 
scope of the admiralty jurisdiction of the Court, as defined in 
the 2d Section, ist Clause of the 2d Article of the United States 
Constitution. 

Colonial Admiralty Jurisdiction Over Insurance. 

The importance of this case in its practical bearing upon 
the future interpretation of the Commerce Clause of the Con- 
stitution in its possible relation to insurance cannot easily be 
over-estimated. In the opinion of the Court, in the case of 
Insurance Company vs. Dunham, as delivered by Justice Bradley, 
than whom no member of the Court from its inception has had 
a more profound knowledge of insurance in all its branches, 
there is a comprehensive review of the laws and ordinances of 
Barcelona of 1435, of Venice of 1468, of Florence of 1523, and 
of Antwerp of 1537; and other ancient sea laws and mari- 

* Cases on the Law of Admiralty, by Jas. Barr Ames, Cambridge, 
1901, p. 47; and for a more extended discussion see "The American 
Admiralty, its Jurisdiction and Practice," by Erastus C. Benedict, 2nd 
Edition, New York, 1870, Chapter XIX, on the Admiralty and Marine 
Jurisdiction of the British Colonies, particularly p. 8$, where policies 
of assurance and bottomry loans are included within the scope of the 
rights and privileges contained in the commission of the Vice-Admiralty 
Judge of the Provinces and Colonies of New York, Connecticut, and 
East and West Jersey, dated Oct. 15, 1762. 

149 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

time codes, which do not require to be enumerated.* Upon 
this basis of ancient law and usage, the Court arrived at the 
conclusion that "in every maritime code of Europe, unless 
England is excepted, marine insurance constitutes one of the 
principal heads," and further that it is a fact that "the com- 
missions in admiralty issued to our colonial governors and ad- 
miralty judges, prior to the Revolution, which may be fairly 
supposed to have been in the minds of the Convention which 
framed the Constitution, contained either express jurisdiction 
over policies of insurance or such general jurisdiction over 
maritime contracts as to embrace them."f 

Lex Mercatoria Americana. 

The marine branch of insurance is no longer the sole or 
most important development of the principle of insurance, but 
other forms of the insurance contract, particularly fire, life and 
accident, have assumed proportions wholly unanticipated when 
the law and legislation of insurance was in its infancy. Insur- 
ance, not being of English origin,! it has required many years 
to perfect both the common and the statutory law which to-day 
governs and controls the business. Not until the practice of 
individual underwriting gave place to the assumption of insur- 
ance risks by chartered corporations, did insurance attain to 
the dignity of a great business, entirely separate and distinct 
from other branches of commercial enterprise. It is only since 
insurance corporations, as such, have come into existence that 
the quasi-public character of the insurance function has become 
better known and understood by law-making and governing 

* For extended references to the early sea laws see "A Treatise on 
Maritime Law," by Henry Flanders, Boston, 1852. 

fCases on the Law of Admiralty, by J. B. Ames, Cambridge, 1901, p. 47. 

JThe earliest policy extant in the records of the Admiralty Court 
is in Italian and bears the date of 1547. The earliest policy in English 
bears the date 1555, and there is another policy of 1557 based on Italian 
forms of earlier date and simpler content than that prescribed in the 
Florentine Ordinance of 1523. See Gow on Marine Insurance, 4th Ed., 
1909, p. 322. 

150 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

bodies. While there has been this change in the public attitude 
toward insurance undertakings, it is nevertheless true that 
in most of the insurance transactions, or in the relations of the 
contracting parties, the Law Merchant* still governs and con- 
trols, except in so far as the common law has established 
certain fundamental principles and as statutory law has 
incorporated these principles into written provisions for 
the more safe and equitable conduct of the business. 
In England a Court of Assurances had been estab- 
lished as early as 1601 and it is recited in the Act of that 
year that policies of insurance were contracts of great value 
in promoting commercial adventure and, therefore, entitled 
to the solicitude and protection of the government. The Court 
of Assurances fell later into this use, but the principle of public 
supervision over these transactions had been clearly recognized 
and was never subsequently lost sight of in English law and 
legislation. f 

* The most important American work on the Law Merchant is "An 
Enquiry into the Law Merchant of the U. S., or Lex Mercatoria Amer- 
icana," by Geo. Caines, N. Y., 1802. (Vol. I only was printed.) 

f In a letter to the Post Magazine and Insurance Monitor of London, 
July 25, 1908, the following letter is re-printed from the Acts of the 
Privy Council, 1579, according to which 22 years before the Act of 1601 
was passed the Privy Council took official cognizance of insurance dis- 
putes and concerned itself with matters of investigation and adjudgment 
similar to the functions subsequently discharged by the Court. The 
letter reads in full as follows: 

[Extract.] 
9 Januarij, 1579, Whitehall. 

Present: — Lord Chancellor, Lord Admiral, Lord Chamberlain, Lord 
Hunsdon, Mr. Comptroller, Mr. Vicechamberlain, Mr. Secretary Walsing- 
ham, Mr. Secretary Wilson. 



A letter to William Mericke, Richard May, Thomas Branly and the 
reste of the Commissioners appointed for matters of Assurances within 
the Cittie of London that whereby a letter from some of their Lordships 
of the 24th of May, 1578, they recommended unto them a complaint 
exhibited unto them by Hippolito Beamonti, a merchant of Luca in 

151 



origin and growth op law and legislation 

Early English Insurance Law. 

The earliest restrictive English legislation, on the subject 
of insurance except as otherwise referred to elsewhere, appears 
to have been 19 George II, c. 37 (1746).* which has refer- 
ence to bottomry bonds, but which included a provision "that 
all insurances, interest or no interest, or without farther proof 
of insurance than the policy itself, by way of gaming or wagering, 
or without benefit of salvage to the insurer (all of which had 
the same pernicious tendency), shall be totally null and void, 
except upon privateers or upon ships or merchandise from 
the Spanish or Portuguese Dominions, for reasons sufficiently 
obvious," etc.f 

This Act was followed in 1774 by the so-called Gambling 
Act, or 14 George III, c. 48, which provided that "no insurance 
shall be made on lives or on any other event wherein the party 
insured had no interest; that in all policies the name of such 

Italye, concerning a controversie betwene him and the assurers of Lon- 
don, which Hippolito had caused to be assured by two severall pollicies 
certen woade from Burdeaux to Roan and Newhaven, which woade, 
after the assurance made, was taken by the Vlissingers and confiscates 
(sic), whereupon the said Hippolito by means of their Lordships' said 
letters unto them obtayned from the said assurers the money by them 
assured; forasmuche as their Lordships by the peticion inclosed are 
geven to understand that by good proofes it is since evidentlie discovered 
that the said woade hathe ben againe recovered with the privitie of the 
said Hippolito from the Flushingers by the two merchauntes in who[se] 
names the same was assured, their Lordships therfore desirous to under- 
stand the veritie thereof, to th'ende that aswell restitucion maie be 
made unto th'assurers of the money by them without cause payed unto 
him, as that the lewde acte of the practiser maie not remayne unpunished, 
doe require them by vertue hereof to call fourthwith before them the 
said assurers and Hippolito, and after they shall have substancially 
examined the matter to certifie unto their Lordships what they finde 
thereof, that thereupon suche order ma ye be taken as shalbe aggreable 
with justice and equitie. 

* Reprinted in full in Cases on Insurance, by Eugene Wambaugh, 
Cambridge, 1901, p. 6. 

t Blackstone's Commentaries, Book II, Chapter XXX. (4th Ed., 
Vol. I, p. 796.) 

152 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

interested party should be inserted, and nothing more shall be re-" 
covered thereon than the amount of the interest of the insured." 

The Common Law of Insurance. 

The legal principles expressed in these two Acts have re- 
mained the law of England to the present day, the first govern- 
ing the marine and other property insurance contracts, while the 
second governs contracts involving life contingencies.* The 
Commentaries of Blackstone upon these Acts contain the sug- 
gestive statement that, "the learning relating to these insur- 
ances hath of late years been greatly improved by a series 
of judicial decisions; which have now established the law in 
such a variety of cases that (if well and judicially col- 
lected) they would form a very complete title in a code of 
commercial jurisprudence; but, being founded on equitable 
principles which chiefly result from the special circumstances 
of the case, it is not easy to reduce them to any general heads 
in mere elementary institutes. Thus much, however, may be 
said; that being contracts, the very essence of which consists 
in observing the purest good faith and integrity, they are vacated 
by any the least shadow of fraud or undue concealment; and, 
on the other hand, being much for the benefit and extension 
of trade by distributing the loss or gain among a number of 
adventurers, they are greatly encouraged and protected both 
by common law and Acts of Parliament, "f 

Smuggling and Contrabrand Trade. 

Mention should be made in this connection, however, of 
an Act passed in 1693, when by the 4th and 5th William and 
Mary, it was provided that "All persons who shall undertake 
by way of insurance or otherwise, to deliver any goods, etc., 

* It requires to be stated in this connection that the English law 
relating to insurance was codified into the marine insurance Act of 
1906 (6th Ed., VII, Chap. 41), but in addition thereto a new marine 
insurance gambling act was enacted by Parliament in 1909. 

t Blackstone's Commentaries, 4th Ed., Vol. I, p. 796. 

153 



/ 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

without paying the duties or customs, or any prohibited goods 
whatever," shall forfeit the sum of .-£500 and that a like sum 
shall be forfeited by the insured. This, so far as known, is the 
first prohibitory statute regulating in part insurance transactions 
in England, enacted, of course, before insurance corporations 
came into existence and when the business was exclusively 
carried on by individual underwriters. The object of the Act 
of 1693 was to place a severe penalty on all insurance of con- 
traband trade, particularly smuggling, regarding which it has 
been pointed out by Millar in his treatise on The Law of Insur- 
ances (Edinburgh, 1787) that " Every person who insures 
contraband goods is assisting and abetting in an evasion of the 
law. Nay, as the insurer takes the risk of capture and seizure 
upon himself, it is he, properly speaking, who is to be considered 
as the smuggler. Every insurance upon a trade which the 
parties know to be illicit, must, therefore, be illegal." 

First Taxes Upon Insurance Policies. 

Only two years before this Act was passed the first regular 
office for insurance against loss by fire had been established in 
London by a group of individual underwriters, but as early 
as 1694 a high stamp duty was imposed on fire policies,* which 
would indicate that fire insurance at this time was not held 
in any particularly high regard by the government. f 

Early English Fire Insurance Companies. 

Fire insurance in England did not come into extended use 
until subsequent to the great fire of London, which occurred 
in 1666. Various early schemes for fire insurance institutions 
were inaugurated during the next thirty years subsequent to 
this date, but none assumed considerable proportions or attained 
to permanency, except in so far that earlier ideas were incor- 

* Report on Fire Insurance Duties, Pari. Paper, London, 1857. 

tin 1698 and during subsequent years the duties were further in- 
creased. See table of data and list of statutes with account of revenue, 
etc., in Report of 1857, opp. p. 9. 

154 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

porated into latter day institutions. A fire office, conceived by 
Dr. Barbon, the first successful projector of fire insurance in 
England, was established in 1667 and in 1686 this concern 
solicited from the Lords of the Privy Council a patent for the 
exclusive privilege of making and registering all assurance 
policies and contracts on houses from fire within the bills of 
mortality for thirty-one years, having insured for so long a 
time. This desire for parliamentary sanction of what would 
be equivalent to a monopoly indicates also the early necessity 
for government protection on the part of those actively engaged 
in the management of institutions of this kind. In 1696, how- 
ever, a society came into existence with the title "Contributors 
for Insuring Houses, Chambers, or Rooms from Loss by Fire, 
with Amicable Contributions within the Cities of London and 
Westminster and the Liberties Thereof and the Places There- 
unto Adjoining." This title was subsequently altered to 
"Amicable Contributors for Insuring Loss by Fire," and subse- 
quently to "Amicable Contributionship," and finally, in 1706, 
to the name of "Hand in Hand." The very title is evidence 
of the fact that the undertaking was a mutual agreement of joint 
contributors, primarily for the individual protection of the sub- 
scribers and incidentally for profit. Similar undertakings came 
into existence with the establishment in 17 10, of the Sun Fire 
in 1 7 14, the Union; and in 17 17 the Westminster, but these 
were mere joint partnerships, and not essentially different from 
other trading concerns.* 

* The following extremely interesting advertisement having reference 
to an insurance project which, in all probability, led to the granting 
of the charter of the Royal Exchange in 1720, was printed in the Post 
Magazine and Insurance Monitor of London, under date of June 4, 1910. 

From " The Post Boy." Numb. 4392. From Thursday Sept. 
19, to Saturday Sept 21, 171 7. 

The SUBSCRIPTION at MERCERS-HALL in CHEAPSIDES for raising 
a FUND of ONE or TWO MILLIONS Sterling, in order to incorporate 
a Company for Insurance of Ships, Merchandise, &c, was open'd the 
12th of August last; begun by an Eminent Merchant of this City, and 

155 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

In 171 1 a proposal had been made for a national insur- 
ance office, by a petition of record to the House of Com- 
mons, "For raising great sums of money all over Great Britain, 
for the use of the Government, to the benefit and security of 
all those that are anyways concerned," for the purpose of 
eliminating private enterprise in fire insurance, it being held 
that "the public good of the nation ought at all times to be 
preferred before the private interest of all societies."* 

Royal Exchange and London Assurance. 

The scheme for national insurance was not carried through, 
but the era of so-called "bubble companies," emphasizing the 
necessity of more secure and permanent insurance institutions, 
accounts for the passage of the Bubble Act, 6 George I c. 18, 
passed in June, 1720, which empowered the King to grant two 
charters to proposed insurance corporations, as the result of 
which the Royal Exchange Assurance and the London Assur- 
ance came into existence that year.f While the object of these 

subscribed by several others: But being desired to be shut till some Altera- 
tions were made therein, and till several who intend to subscribe largely 
thereto can come to Town, to subscribe for themselves. Notice is hereby 
given, That pursuant to the Desire of several considerable Merchants and 
others, the following Alterations are made, by and with the consent of those 
who have already subscribed, viz. Whereas the subscription was at first 
limited to such as are Natives or Naturalized; it is agreed to admit any 
that are His Majesty's Subjects, Men of Substance and Reputation: And 
instead of One per Cent, no Subscriber is to pay more than Half per cent. 
towards defraying the Charges of forming the Company, and obtaining a 
Charter. N.B. The Subscription will be open'd again on Wednesday next 
at Eight in the Morning. No Subscriber is oblig'd to pay the Half per Cent. 
nor one Penny on any Account whatever, till the Managers &c. are chosen; 
nor then, if he do not like the Company. Abstracts of the Articles are de- 
liver'd (Gratis) to those that come or send for them to the Hall. 

* History of Fire Insurance Companies, by F. B. Relton, p. 93. See 
also Walford Insurance Cyclopedia, Vol. Ill, p. 438 et seq. 

f For a full account of the origin, powers and privileges of the Royal 
Exchange and London Assurance, see Lex Mercatoria Rediviva, by 
Wyndham Beawes, London, 1752, p. 262 et seq. Also, John Weskett, 
Theory, Laws and Practice of Insurance, London, 1781, p. 108 et seq. 

156 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

two institutions was primarily, and apparently exclusively, the 
making of marine insurances, their activity later included other 
branches of the business. The charters granted an exclusive 
monopoly, without, however, interfering with the practice of 
individual underwriting. The charters were revocable at the 
expiration of thirty-one years and it was provided that "All 
other corporations and all partnerships for assuring ships or 
merchandise at sea or for lending money upon bottomry should 
be restrained from underwriting any policies or making any 
contracts of assurance on ships or merchandise at sea," etc., 
but, "nevertheless any particular person shall be at liberty 
to underwrite policies, or may lend money by way of bottomry, 
so as the same be not upon the account or risk of a corporation 
or of persons acting in partnership."* 

By an Act passed in the year 1725, "All promissory notes 
for assurance on ships or merchandise in either company were 
declared null and void." A revised set of proposals had been 
issued by the Royal Exchange in 1722, according to which the 
corporation was then authorized to assume fire risks, it being 
stated that "His Most Gracious Majesty, being desirous to 
promote and encourage such lawful and commendable under- 
takings as are calculated for the security of all his loving sub- 
jects, has granted to this Corporation his Royal Charter for 
those ends and purposes, by virtue whereof they now assure 
houses, buildings, goods, wares and merchandises, from loss 
and damage by fire, throughout the Kingdom of England, and 
Town of Berwick-upon-Tweed, the Kingdom of Ireland, and all 
other parts of His Majesty's dominions beyond the seas, upon 
the following easy terms," etc.f 

English Insurance Law in the American Colonies. 

The foregoing sentence proves clearly that the objects of 
the Royal Charter were to establish a national institution with 

* Fowler, History of Insurance, p. 9. 

t An Account of Fire Insurance companies, compiled by Francis B. 
Relton, London, 1893, p. 160. 

157 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

power to transact business throughout the British dominions 
including, of course, the American colonies, but it is very curious 
that Scotland was not mentioned as coming within the field of 
the corporations' operations. Relton in this connection observes 
that "Respecting the undertaking insurances in all parts of His 
Majesty's dominions beyond the seas, it is not impossible that 
the projectors of the Royal Exchange Corporation, who were 
connected with marine insurance, were aware of the fact that 
Lloyds undertook such fire business (presuming that they did 
so), and so made it a feature in their proposals in order to 
compete with Lloyds in fire as well as in marine insurance." 
Historical evidence is not wanting to prove that a considerable 
amount of marine insurance was transacted in the Colonies by 
the mother country, for in a letter written to William Penn by 
a Mr. James Logan, the Secretary of the Province of London, 
dated January 2nd, i7o6-'o7, the conscientious scruples of the 
Quaker against insurance are answered in the statement that 
"I beseech thee not to be scrupulous in insuring, for if I have 
any right notion of the matter 'tis as just and lawful as any 
other part of trade." The considerable extent of piracy on the 
American coast made insurance at this time an absolute neces- 
sity and without such insurance a large part of colonial trade 
would, unquestionably, have come to an end. 

First ' Public Insurance Office ' in America. 

The historical connection of what has just been.relatedwith 
subsequent events in America is not, of course, to be substan- 
tiated by an unbroken chain of documentary evidence. There, 
however, can be no doubt but that the development of the 
insurance business in the Colonies followed largely and in many 
instances almost literally the preceding development of insur- 
ance institutions in England. Co-incident therewith, of course, 
was the development of insurance law and the relationship of 
government to insurance institutions. The earliest authentic 
account of "a public insurance office" in America is found in 
an item of the American Weekly Mercury of May 25th, 17 21, 
158 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

in which Mr. John Copson, of High Street, offers his services 
as an insurance broker to the merchants of the city "and other 
parts." According to Fowler, the advertisement read as follows: 

"Assurances from Losses happening at Sea, &c, being 
found to be very much for the Ease and Benefit of the Merchants 
and Traders in general ; and whereas the Merchants of this City 
of Philadelphia and other Parts have been obliged to send to 
London for such Assurance, which has not only been tedious 
and troublesome, but even very precarious. For remedying 
of which, An Office of Publick Insurance on Vessels, Goods and 
Merchandizes, will, on Monday next, be Opened, and Books 
kept by John Copson, of this city, at his House in the High 
Street, where all Persons willing to be Insured may apply: 
And Care shall be taken by the said J. Copson That the Assurers 
or Under Writers be Persons of undoubted Worth and Repu- 
tation, and of considerable Interest in this City and Province."* 

We have here conclusive proof that the early insurance 
transactions in the Colonies had been carried on in London, but 
that it was now proposed, since sufficient security could be 
furnished, to afford an opportunity for taking out insurances 
in the principal seaport towns of the Colonies. 

A Plea for Government Insurance. 

Influenced, however, in all probability, by the proposal 
for a national insurance office, made in 1711, the earliest of 
American political economists, Francis Rawle, proposed the 
establishment of a semi-governmental insurance institution in 
1725. The proposition, in part, reads that 

11 Having thus far discours'd of most of the Branches of 
Trade we are capable of, there is yet one great Encouragement, 
to adventure in the Discovery and Prosecution of new Markets ; 
more safe to the industrious Adventurer ; namely an Insurance- 
Office in one or more of these Colonies ; which is the interesting 
of divers in the Loss or Profit of a Voyage, and is now become 
so much the Practice of England, that Insurance may be had in 
divers Cases as well against the Hazards at Land, as Casualties 
at Sea, which must be acknowledged not only to be safe, but a 

♦Fowler, History of Insurance, p. n. 

159 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

great Encouragement to Adventure ; for it may so happen that 
a Person may sometimes adventure his ALL, and then in case 
of a Loss he may be rendered uncapable of a future Trade, 
to the Disadvantage of the Publick, and (it may be) to the Ruin 
of himself; whereas could he get a part of his Interest either 
of Ship or Cargo insured, (tho' in Case of safe Arrival he parts 
with a part of his Profit, yet, in case of loss, he is secur'd of 
such part as he insureth, which may be sufficient Bottom to 
begin a new Adventure : How far this may conduce to the Trade 
of this River, is obvious to any Man of Thought. Now whereas 
there has been some Attempts made at Philadelphia, which 
dropt and prov'd abortive, (for what Reasons we never could 
learn) we numbly propose to the Legislature that an Office 
be erected and supported by a Fund arising out of the Interest 
of the Loan-Office. This will be a good and safe Bottom, and 
cannot be easily overset by a few losses; and we conceive will 
contribute to keep up the Value of our Paper-Credit by pro- 
moting of Trade, Navigation and Building of Ships, and in Con- 
sequence, of great Advantage to this River: Which we prefer 
to the Consideration of the Merchant." * 

Aside from other reasons, this proposal could not have been 
carried into effect, since it would have come in conflict with 
the monopoly granted to the Royal Exchange and London 
Assurance Corporations. Rawle probably was not aware of the 
Statute of 6th George I, c. 18, but in any event no action was 
taken in the matter. The proposal, however, is a most interest- 
ing one and particularly so in view of the fact that Rawle held 
insurance to be a branch of trade, in full conformity to other 
writers on the subject of that early period. 

First Mention of "America" in an English Insurance 
Statute. 
Following the establishment of an insurance office by John 
Copson in 1721, the next office in Philadelphia of which there 
is record was established by Joseph Saunders, in 1750; followed 
by Thomas Wharton, in 1752; and by Walter Shee, in 1756. 
The small number of separate offices is not an indication, how- 

*Ways and Means for the Inhabitants of Delaware to become Rich, 
Fowler, History of Insurance, pp. 62-63. 

160 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

ever, of the amount of business transacted, since offices of this 
kind were merely for the purpose of facilitating intercourse 
between insurers and insuring merchants. The law governing 
these transactions in the American Colonies was, of course, the 
law of England, including the statute of 1746, regulating insur- 
ance on ships belonging to Great Britain and on merchandise or 
effects laden thereon. The preamble to this Act sets forth that, 

" The making Assurances Interest or no Interest, or without 
further proof of Interest than the Policy, hath been productive 
of many pernicious Practices, whereby great Numbers of Ships, 
with their Cargoes, have either been fraudulently lost and 
destroyed, or taken by the Enemy in time of War; and such 
Assurances have encouraged the Exportation of Wool, and 
the carrying on many prohibited and clandestine Trades, which, 
by Means of such Assurance, have been concealed, and the 
Parties concerned secured from Loss, as well to the Diminution 
of the publick Revenue, as to the great detriment of fair 
Traders; and, by introducing a mischievious kind of Gaming 
or Wagering under the Pretence of assuring the Risque on 
Shipping and fair Trade, the Institution and laudable Design 
of making Assurances hath been perverted; and that which 
was intended for the Encouragement of Trade and Navigation 
has, in many Instances become hurtful of, and destructive to, 
the same: For Remedy whereof it is enacted, 

That, from and after the first Day of August, 1746, no 
Assurance or Assurances shall be made, by any Person or 
Persons, Bodies Corporate or Politick, on any Ship or Ships, 
belonging to His Majesty or any of his Subjects, or on any Goods, 
Merchandise or Effects, laden or to be laden, on board of such 
Ship or Ships, Interest or no Interest, or without further proof 
of Interest than the policy, or by way of Gaming or Wagering, 
or without Benefit of Salvage to the Assurer, and that every such 
Assurance shall be null and void to all Intents and Purposes," etc. 

The Act further provided that the same should "not ex- 
tend to, or be in force against, any persons residing in any parts 
of Europe out of His Majesty's dominions, for whose account 
assurance shall be made before the 29th of September, 1746; 
nor against persons residing in any parts of Turkey, Asia, Africa, 
or America, from whom assurances shall be made before the 

161 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

29th of March, 1747."* This is probably the first mention of 
the word 'America' in an insurance statute and by inference the 
reference proves that insurance transactions between the mother 
country and the Colonies at that time were of sufficient con- 
sequence to require special consideration. 

Early Prohibitive Insurance Statutes. 
Prohibitory or regulative statutes of insurance were neither 
new nor novel at the time when the Act of 1754 was passed. 
The Civic statutes of Genoa (1588), according to Fowler, pre- 
scribed penalties for securities, bonds or wagers made upon the 
life of the Pope, or upon the life of the Emperor, or any consti- 
tuted dignitary, ecclesiastical or secular, without license of the 
Senate. The 24th Article of the Ordinance of Amsterdam of 
1598 expressly prohibited insurance on the life of any person 
and even earlier than this there is record of a similar prohibi- 
tion in a French maritime treatise entitled Le Guidon, accord- 
ing to which (Sec. 5) "Another kind of insurance is made in 
other nations, it is upon the lives of men; by which in case of 
their dying during a voyage certain sums are to be paid to 
their heirs or creditors. Creditors may even insure their debts 
if their debtors remove from one country to another; the same 
can be done by those having rents or pensions, so that in case 
of their decease there will be continued to their heirs such 
pension or rent. These are all forbidden as against good morals, 
being customs from which endless abuses and deceptions arose." f 
In this connection Fowler observes that " Legal regulations as 
following and developed by the insurance practices had shown 
themselves in a decree of 1369 of the Duke of Genoa in an 
ordinance promulgated by the magistrates of Barcelona in 1435, 
and in a law of Flanders of 1537." Regulations of the insurance 
of Antwerp and Amsterdam followed later in the 16th Century. 
The famous "Ordonnance de la Marine" enacted in France in 



* Postlethwayt, Universal Dictionary of Trade and Commerce, Lon- 
don, 1751, Vol. I. p. 146: 

t Fowler, History of Insurance, p. vii. 
162 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

1681 provided by Art. 10, that "We forbid the making of any 
insurance upon the life of men," but an exception was made 
by Art. 11, for the insurance of persons against the risk of 
captivity, to provide the required amount of ransom. The 
prohibition of life insurance in France naturally prevented the 
development of this branch of insurance in that country and 
the practice was not introduced, according to Bunyon, until 
the latter part of the 18th Century. John Millar, an advocate 
of Edinburgh, in his treatise on the elements of the law relating 
to insurance, published in 1787, observes in this connection that 
"many of the foreign mercantile states prohibit insurance on lives, 
a prohibition arising from the jealousy naturally entertained in 
an ill-regulated government, of whatever may serve as a motive 
to the commission of great crimes. The same jealousy is yet 
more apparent in some of the Italian States, where insurance is 
not only prohibited on the lives of great men, but on any politi- 
cal occurrence, and even on marriages and the birth of children."* 

Wagering Contracts in English Law. 

This observation by a trained legal mind near the close 
of the 1 8th Century illustrates the viewpoint held with reference 
to the nature of wagering policies and the important element of 
insurance interest. While England was apparently the first coun- 
try to prohibit insurances without interest, practices nevertheless 
have been permitted which have been prohibited in practically 
all other civilized countries. The English in this respect make 
a distinction, more or less clearly defined, between insurance 
wagers not contrary to public policy but conducive to the 
development of trade and insurance practices clearly contrary 
to the public good and incompatible with high standards of 
private and public morality. This explains why the immense 
amount of wagering transactions carried on at Lloyds upon 
the life of the King and a thousand and one other contingen- 
cies are permissible in England, while not permitted or con- 
doned in other civilized countries. 

♦Law Relating to Insurances, by John Millar, Edinburg, 1787, p. 26. 
163 



origin and growth of law and legislation 

The Doctrine of Insurable Interest. 
Prohibitory or regulative statutes governing the business 
of insurance in England have been very few and far between. 
The two statutes of 1746 and 1774 have practically governed 
the essentials of the business even to the present day. Even 
these Acts were not statutory declarations of new principles 
of law, but rather the precise enunciation of long-established 
principles of the common law. The principle of insurable interest 
had been laid down certainly as early as 1692 in the Chancery 
Courts case of Goddard vs. Garrett, wherein it was stated that 
the Court "took it that the law is settled that if a man has 
no interest and insures, the insurance is void, although it is 
expressed in the policy 'interest or no interest'; and the reason 
the law goes upon is that these insurances are made for the 
encouragement of trade and not for persons unconcerned in 
trade nor interested in the ship to profit by it." In the famous 
case of Sadlers' Company vs. Badcock (1743), it was said with 
reference to fire insurance that "Now these insurances from 
fire have been introduced in later times and therefore developed 
from assurance on ships, because there interest or no interest 
is almost constantly inserted and if not inserted, you cannot 
recover unless you prove a property." The statutory definition 
of the principle of insurable interest makes, therefore, written 
law of what had theretofore been the unwritten or common 
law of England for a long period of time. The commercial 
character of all insurance at this early period is clearly brought 
out by the frequent reference to insurances as transactions 
in trade and the law of England, as applied to both the con- 
tractual relations of parties and the Parliamentary supervision 
and control over the business, has been in conformity to the 
principles of the Law Merchant, or, as said by Lord Mansfield, 
Chief Justice (1777), "A policy of insurance is in the nature of 
it a contract of indemnity and of great benefit to trade, but the 
use of it was perverted by its being drawn into a wager and to 
remedy this evil the statute of the 19 Geo. II, c. 37 (1746), 
was made." 

164 



origin and growth op law and legislation 

The Evolution of Common and Statutory Law of 
Insurance. 

The development of English statute law in conformity to 
previously established principles of common law is of the utmost 
and far-reaching importance. The trend of modern law-making, 
so-called, is continuously to draw away from common law 
principles, or to set aside long-established legal definitions which 
custom has sanctioned and to which immemorial usage has 
given a definite and generally understood meaning. Statutes, 
it has well been said, "are not reasons, but they are a mere 
command," but the common law is reason, or that law which 
derives its force and authority from the universal consent and 
immemorial practices of the people. The simple but effective 
statutes of 1746 and 1774 governed in the business of insurance 
in the American Colonies and they were incorporated in the 
law of the land, after the Declaration of Independence. The 
business of insurance up to that time had been practically 
limited to marine insurance and few cases came before the 
courts for final adjudication. In all such cases the law of Eng- 
land governed in essential matters, but particularly and with- 
out exception in the judicial construction of principles of 
insurable interest. In fact, the American courts adopted a far 
more rigid construction of the two statutes of 1746 and 
1774 than had been the case in England where wagering policies 
were held to be valid in some cases, unless found to be distinctly 
contrary to public policy. The early policies issued in America 
were identical in phraseology with the policies issued in Eng- 
land, including the ancient phrase that "It is agreed by us, the 
assurers, that this writing or policy of assurance shall be of 
as much force and effect as the surest writing or policy of assur- 
ance heretofore made in Lombard Street or elsewhere in Eng- 
land." That phrase occurs in a policy dated Philadelphia, 
April 25th, 1749, the original of which has been preserved 
and a facsimile of which has been printed in Fowler's History 
of Insurance, but after the Declaration of Independence the 
stately phrase which had been at the head of English and Con- 

165 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

tinental policies from time immemorial "In the name of God, 
Amen," was omitted and the phrase previously referred to was 
changed to read, certainly as early as 1788, "And it is agreed 
by us, the assurers, that this writing, or policy of insurance, shall 
be of as much force and effect as the surest writing, or policy of as- 
surance heretofore made in any of the United States or elsewhere." 

Judicial Interpretation of American Insurance Policies 
in Conformity to English Law and Customs of Trade. 
In the judicial interpretation of insurance contracts, how- 
ever, English law and usage determined the legality and 
as said in a case which came before the Supreme Court 
of Pennsylvania in January, 1795, "This case is distinguished 
from that of Williams vs. Craig. There was no established rule 
of trade between France and Philadelphia. Our trade with 
that country began and ended with the American war. But 
between England and Philadelphia a settled rule has subsisted 
for many years, and the usage has been generally approved of. 
The plaintiff's charge for insurance was contained in every ac- 
count rendered to the defendant; and as he made no objection 
thereto, he must necessarily be supposed to have acquiesced in 
the custom of the English merchants." In a similar case tried 
before the same court, also in 1795, the testimony was accepted 
that " The defendant's construction of the policy was con- 
formable to the general sense and usage of merchants and this 
view w T as adopted by the Court and Jury." * Finally, in a case 
decided at the March term, 1803, the Supreme Court of Penn- 
sylvania declared that " We have adopted the policy and 
principle which gave rise to the British statute of 19 George II, 
c. 37, in courts of justice and by commercial usage, but we are 
not prepared to say that every particular provision or resolution 
under it has been engrafted into our system of law."f A few 
years previous the Supreme Judicial Court of Massachusetts in 
the case of Amory vs. Gilman (1800) reviewed the whole question 

* 3 Dallas, 510. 

t Fowler, History of Insurance, p. 66. 
166 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

of English law as underlying American jurisprudence in matters 
of insurance it being stated inter alia that " By the com- 
mon law at the time of our ancestors' emigration and for 
nearly a century afterward such a contract (gambling) was 
void. During the last century the English Courts began to 
sustain actions on this species of contracts, but their decisions 
have not been adopted here. The ancient law of England 
and the usage of this country must then decide this question. 
The forcible objections recited in the preamble to the statute 
19 George II, c. 37, received additional force from our morals, 
manners and the spirit of our law. The question whether the 
statute of 19 George II has been adopted here is now before 
the Court on another section of it (relating to re-assurances) 
in which it was fully argued. But it is absurd to suppose that 
our courts have adopted the decisions of the English courts 
in the early part of the last century, involving all the mischiefs 
of these gaming policies, and yet have failed to adopt this 
statute in remedy of the evil." After an extended examination 
of the facts and legal principles involved in the English court 
decisions in plain conflict with the statute referred to, Justice 
Sedgwick, observed in part that "After reflecting on these obser- 
vations, which every man of experience and a knowledge of the 
human character knows to be well founded, there can, I think, 
remain no doubt that it would be hostile to the welfare of society 
that interests which men may choose to create by such contracts 
should be protected by judicial authority. Much additional 
weight is given to the argument by the British statute, 19 
George II, c. 37, prohibiting wager policies. It is the authority 
of a wise legislature of a nation most deeply interested in commerce, 
and best understanding its interests ; and it prohibits them be- 
cause they are "productive of many pernicious practices." 

Insurance Contract Governed by Considerations 

of Public Policy. 
Chief Justice Dana, observed " We must, therefore, decide 
this on general principles of justice and good policy. The very 

167 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

forcible reasons set forth in the preamble of the statute, 19 
George II, c. 37, to which I have before referred, apply equally 
to this and every other civilized and well-governed commercial 
country. Whether that statute extended to this country or 
not is a question not necessary now to be determined. But 
if it were, and we should find no precedents in our courts to 
overrule us, I should be prepared to say that, as wager policies 
are injurious to the morals of the citizens, tend to encourage 
an extravagant and peculiarly hazardous species of gaming, 
and to expose their property, which ought to be reserved 
for the benefit of real commerce, they ought not to receive the 
countenance of this court." 

In a case quite similar, of Pritchard vs. Insurance Company 
of North America, Shippen, Chief Justice, in answer to a 
contention of counsel that the Gambling Act had not been 
extended to Pennsylvania by practice said, ''Certainly the 
British Act does not bind us, proprio vigore; but the system 
of national policy which dictated the law has been adopted 
by our courts. We believe that policies made here, at least 
by the incorporated companies, do not retain the words 
'interest or no interest.' " And, Yeates, Justice, for the court 
said: "The Chief Justice, during the argument, conveyed the 
sentiments of the whole court. We have adopted the policy 
and principles which gave rise to the act of Parliament, 
both in courts of justice and by commercial usage; but we 
are not prepared to say that every particular provision or 
resolution under it has been engrafted into our system of law. 
An insurance amongst us is a contract of indemnity. Its 
object is not to make a positive gain, but to avert a possible 
loss. A man can never be said to be indemnified against a 
loss which can never happen to him. There cannot be an in- 
demnity without a loss, nor a loss without an interest. A 
policy, therefore, made without interest is a wager policy, 
and has nothing in common with insurance but name and form. 
It is not subservient to the true interests of fair trade and com- 
merce, but is pregnant with as much mischief, both public and 

168 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

private, as can proceed from any species of gaming which the 
legislature has hitherto found it necessary to repress. Every 
species of gaming contracts wherein the insured having no 
interest, or a colorable one merely, or having a small interest 
much overvalues it in a valued policy, under the cloak of insur- 
ances, are reprobated both by our law and usage."* 

Limited Extent of Insurance in the American Colonies. 

These illustrations from the early history of American 
law sufficiently prove that the fundamental principles of 
English law on the subject of insurance were incorporated into 
the system of American jurisprudence, as being in conformity 
to the more ancient but controlling principles of the Law 
Merchant, or Lex Mercatoria. The extracts quoted also prove 
conclusively that from the legal, as well as the general, point 
of view insurance was considered an element of commerce and 
that insurance transactions were held to be commercial trans- 
actions not separate and distinct from commercial affairs gen- 
erally. It requires always to be kept in mind that insurance 
in the Colonies never attained to the dignity of a corporate 
business and that the transactions were, on the whole, of small 
extent and practically limited to a few seaport towns. Naturally, 
legislation was not required to intervene in the development 
of such a business and no legislative action was called for 
until applications were made to the different State Legisla- 
tures for charters to establish separate and distinct insurance 
corporations. 

First Fire Insurance Association Established in 

South Carolina in 1735. 
The first attempt to establish an insurance office in Massa- 
chusetts had been made as early as 1724 by Joseph Marion of 
Boston, who four years later, under date of November 18, 1728, 
advertised a proposal to establish the New England Sun Fire 
Office, which, however, did not materialize. In 1735 the Fire 
* Wambaugh, Insurance Law, Cases, p. 16. 
169 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

Insurance Friendly Society of Charleston, S. C, came into 
existence, but it was only of short duration, its career being 
ended by a disastrous fire in 1740, causing alossof $1,500,000.* 
The public protection against the fire risk was very crude 
and the first fire company for protective purposes was not estab- 
lished in Philadelphia until 1738. Joseph Marion, in 1748, 
made a second unsuccessful attempt to establish the New Eng- 
land Sun Fire Office, but it was not until 1752 that the first 
successful American fire insurance association! after the model 
of the London Amicable was established by deed of settlement for 
"not merely the mutual security of the members, but for the 
common security and advantage of their fellow citizens and 
neighbors and the promoting of a great and public good apart 
from all motive of private and separate gain." The name first 
subscribed to this deed of settlement was that of James Ham- 
ilton, the Lieutenant-Governor of the Province under the 
proprietors, and of this it has been said that "it was the 
name of a public officer; announcing the approbation and 
favor of the government, but indicating no special participation 
in originating the company." The first private name on the 
document was that of Benjamin Franklin, who also became 
one of the first Directors. Franklin has often been claimed 
to have been the originator of this plan, but it is practically 
certain that the author of the project was John Smith ,J and 
Franklin nowhere in his writings has claimed the merit 
of having founded the first successful institution to transact the 
business of fire insurance in America. § 

* For an account of " Friendly Society for the Mutual Insuring of 
Houses against Fire," established in Charleston, S. C, in 1735, see the 
South Carolina Historical and Genealogical Magazine for Jan., 1907. 
This was probably the very first fire insurance institution in America. 

t The term "association" is used here in a general sense. 

% " For a statement of the facts, see the account of the Centennial 
Meeting of the Phila. Contributionship for Insurance of Houses from 
Loss by Fire, Phila., 1852, p. 22 et seq." 

§ According to James Schouler, Franklin in 1738, however, originated in 
Philadelphia the First Volunteer Fire Co. for protective purposes. 

170 



origin and growth of law and legislation 

The Philadelphia Contributionship. 

The society was not incorporated until 1768. It was never 
more nor less than a mutual fire insurance society and not a 
trading company or partnership, engaged in the business of 
insurance within the meaning of the Act of 1720. It was a 
concern or an arrangement for the profit and loss of the mem- 
bers, established by public sanction through the participation 
of a high officer of State in its organization. The business done 
was very small and after ten years of effort the amount of 
insurance in force was less than at the end of the first. The 
company relied for its success upon premium charges ill-con- 
sidered with reference to the true fire risk and not until a change 
was adopted in 1763 by which a guarantee fund was gradually 
accumulated as a safeguard against the conflagration hazard did 
the business of the society attain to considerable proportions. 
The society in all its essentials was modeled after the Amicable 
Contributionship, including the use of the sign of the clasped 
hands, which later gave to the London company the name of 
Hand in Hand. The management was remarkably able from 
the outset and during a whole century of active effort only one 
lawsuit was brought against the institution and in that the 
company was successful.* 

First Life Insurance Institutions in America. 

The Contributionship, however, was not the only insurance 
institution established in Philadelphia during the middle of the 
1 8th Century. For similar reasons of mutual protection and 
security, the Presbyterian Ministers' Fund had been chartered 
in 1759 and ten years later a more ambitious charitable 
"corporation" of the Episcopal Church. These also were not in- 
surance corporations as trading concerns or of general scope, but 
rather special efforts in the field of mutual aid, combined more 
or less, in the case of the last named, with charitable assistance 



* Centennial Meeting of the Phila. Contributionship for Insurance 
of Houses from Fire, Memorial Sketch, Phil., 185 1, p. 49. 

171 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

from the well-to-do. It was explained in the first account of 
the Charitable Corporation that "The distressed circumstances 
in which the Episcopal Clergy in the more northern provinces 
of America and especially the Missionaries in the Service of the 
Society for the propagation of the Gospel, have too frequently 
been obliged to leave their families, had long been a matter 
of discouragement to many from entering into the Ministry of 
our Church, as well as of regret to pioneer and worthy members 
thereof." A scheme was, therefore, drawn up at Perth 
Amboy, N. J., May 12th, 1768, and finally adopted by the 
three provinces interested in the matter, a charter for Penn- 
sylvania being obtained on the 7th of Feb., 1769. The charter 
began with "George the Third by the Grace of God" and in- 
cluded the explanation that "corporations have by charter been 
erected in the provinces of Pennsylvania and New Jersey for 
receiving moneys and dispensing of such sums of money as may 
be contributed and given as a fund towards the support and 
relief of the widows and children of said clergy; and for the 
further promotion of which laudable and charitable design," 
etc., etc. 

Insurance Supervision by the Church of England. 

It is thus apparent that, like the Contributionship, this 
was not a trading corporation or a business concern in the 
true sense of the word, but a semi-charitable enterprise or 
voluntary contributionship, established for a specific purpose 
and for the use and benefit of a special class. In recognition, 
however, of the financial and general fiduciary consideration 
incurred in the undertaking by the Episcopal church, 
it was provided in the charter, "And lastly, we do hereby, 
for us, our heirs, and our successors, ordain, order and 
appoint that the accounts and transactions of the said 
corporation, legally and properly vouched and authenti- 
cated shall from time to time, and as often as demanded, be 
laid before the Lords Archbishops of Canterbury and York and 
the Bishop of London, for the time being, or such persons as 
172 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

they may from time to time appoint for that purpose in Amer- 
ica, in order that the said Archbishops of Canterbury and York 
and the Bishop of London, for the time being, or such person 
or persons appointed by them, as aforesaid, may satisfy and 
confirm the said accounts, or subject them to such revisal, 
check and confirmation as may be thought just and reason- 
able." * In other words, the corporation was subject to the 
ecclesiastical authorities and the canon law with a full recog- 
nition of the principle of supervision and control over its accounts 
and actions. This is the first instance of public supervision 
and regulation of insurance in America and it is therefore his- 
torically true, that insurance, practically from its inception in 
all civilized and commercial countries, whether as a business or 
a mutual contributionship, for the purpose of gain or mutual 
aid, has been a matter of serious concern to government, in- 
cluding the ecclesiastical authorities, in the same manner that 
the contract has been the subject of the civil and canon law 
from its origin in ancient times. 

The Rules and Customs of Boston. 

By 1770 there were therefore only three insurance institu- 
tions in existence in Philadelphia, but none of these, as has 
been shown, were commercial undertakings or trading corpora- 
tions, which, in fact, they could not have been without coming 
in conflict with the Act of i7i9-'2o. (6 Geo. I. c. 18) which was 
in full force in the Colonies. In that year, in fact, according 
to Schouler,f who is the best possible authority, no fire insur- 
ance company had been established in New York City at that 
time, nor had several attempts to organize such an institution 



* " Some account of the Charitable Corporation lately erected for the 
Relief of Widows and Children of Clergymen in the Communion of the 
Church of England in America," for a copy of their charter and funda- 
mental rules, and also a sermon preached Oct. 10, 1769, before the said 
Corporation on the occasion of their first meeting, by Wm. Smith, D. D., 
published by order for the benefit of the charity. Philadelphia , 1 769, p. 1 1 . 

t Americans of 1776, by Jas. Schouler, New York, 1906, p. 69. 

173 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

in Boston been successful. The Stamp Act* of 1765 included 
documentary duties upon all insurance policies, but this seems 
not to have attracted special attention or been considered 
a particularly obnoxious burden upon the business by those 
engaged therein at the time. The Revolution, naturally, was 
not a favorable period for the formation of chartered companies 
or corporations to engage in the business of insurance, but it 
is on record that in the first year after the peace the term "com- 
pany" was used to give dignity and standing to the insurance 
office of some twenty associated individual underwriters of 
Boston. The difficulties or disputes between underwriters and 
the insured were, adjudicated according to the changed con- 
ditions and settled "agreeable to the Rules and Customs of 
Boston" and not London, just as the reference to Lombard 
Street and Royal Exchange and London had before this been 
eliminated from American policies. While the term "company" 
was used in the advertisement of Hurd and Jeflery of Boston, 

* The paragraph in the Stamp Act referring to insurance reads, in 
part, as follows: 

"And be it further enacted , That every deed, instrument, 

note, memorandum, letter, or other minument or writing, for or relating 
to the payment of any sum of money, or for making any valuable con- 
sideration for or upon the loss of any ship, vessel, goods, wages, money, 
effects, or upon any loss by fire, or for any other loss whatsoever, or 
for or upon any life or lives, shall be construed, deemed, and adjudged 
to be policies of assurance, within the meaning of this act; and if any 

such deed, for insuring, or tending to insure, any more than 

one ship or vessel for more than any one voyage, or any goods 

or other matter or thing whatsoever, for more than one voyage, or in 
more than one ship or vessel, or being the property of, or belonging to, 
any more than one person, or any particular number of persons in 
general partnership, or any more than one body politick or corporate, 
or for more than one risque; then, in every such case, the money insured 
thereon, or the valuable consideration thereby agreed to be made, shall 
become the absolute property of the insured, and the insurer shall also 
forfeit the premium given for such insurance, together with the sum 
of one hundred pounds." Select Charters and other Documents illustra- 
tive of American History, 1606-1775, edited by Wm. Macdonald. New 
York, 1899, pp. 289-290. 

174 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

there were no incorporated or chartered institutions engaged 
in the business of insurance in Massachusetts or New York in 
the first year of the Republic, except the three institutions in 
Philadelphia, which do not properly come within the definition 
of insurance companies as trading concerns. 

First Massachusetts Insurance Charters. 

For the apparently insignificant reason that the Philadel- 
phia Contributionship would not accept risks upon buildings 
surrounded by trees, a "Mutual Assurance Company" for 
insuring houses from loss by fire in and near Philadelphia was 
organized in 1784. The company became known as the Green 
Tree Company, but in its organization differed little from the 
contributionships. The time, however, had come with the 
return of peace and prosperity for the more serious considera- 
tion of establishing insurance companies with sufficient capital 
to give real instead of fancied security to the insured. In 1785 
a petition was presented to the Massachusetts Legislature to 
permit of the establishment of a fire insurance company in 
Boston, but according to Hardy* the petition was rejected 
"as not being for the advantage of the Town." Evidently the 
principle of insurance as a matter of corporation enterprise had 
made small progress even in the populous centers of trade on 
the Atlantic seaboard. The Massachusetts Congregational 
Charitable Society was established, however, in 1786, probably 
identical in aims and purposes with the corporation of a corres- 
ponding character established by the Episcopal Church. In all 
these and similar cases the object seems rather to have been to 
provide for a small or special class of persons than to further 
the principle of insurance as applicable to the masses of the 
people. Life insurance at this time was a matter of mere crude 
speculation, but as early as 1789 Wiggles worth, a Massachusetts 
clergyman, had calculated a life table from the more or less 
trustworthy vital records of a few selected counties of the 

* Early Insurance Offices in Massachusetts, by E. R. Hardy, p. 57. 
175 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

State. The Rev. Mr. Gordon* in a sermon preached in Boston 
in 1772 had argued in favor of extending life insurance to the 
general population, but nothing had come of it, except that some 
encouragement was given to promoting tontine schemes, which 
came perilously near to being in conflict with the provisions 
of the Gambling Act. 

Annuity Proposals Before the Continental Congress. 

Law and legislation on insurance were hardly required under 
conditions like these. It would have been absurd to legislate 
regarding a business which was of such very limited extent as 
insurance. Lotteries were common and absorbed most of the 
surplus earnings of the mass of the people. The Continental 
Congress had considered various annuity schemes and a com- 
mittee on the subject had been appointed in Nov., 1779, but 
earlier than this, that is, April, 1779, it had been "Resolved 

that million dollars be borrowed on the faith 

of these United States in annuities for one life at .... % 
and .... % for two lives, without distinction of age, that the 
annuity shall not be for less than 50 dollars on one life and 75 
dollars for two lives yearly income. Strangers not naturalized, 
or citizens or subjects of any nation or country may acquire 
the said annuities, which shall not be liable to forfeiture or 
confiscation, even in case of war between the United States 
and the country of which the annuitant may be a citizen." 
Finally it was suggested that the Board of Treasury be author- 
ized to take the proper measures to carry said resolution into 
effect. The Committee on the Treasury, under date of April 21, 
1779, recommended "that twelve million dollars be borrowed 
on life annuities. Your Committee have reason to think that 
a plan of this nature would be very acceptable to the citizens 

* The title of this work is " The Plan of a Society for Making Provi- 
sions for Widows by Annuities for the Remainder of Life, and for Grant- 
ing Annuities to persons after Certain Ages, with the proper tables for 
calculating what must be paid by the several members in order to secure 
the said advantages," by Wm. Gordon, Boston, 1772. 

176 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

of these States and meet with great encouragement." * No 
action was taken by the Congress in this matter, but the pro- 
posals are of much historical significance, and the first sugges- 
tions for Government Annuities in the United States. The 
refusal of the Continental Congress to act in the matter was, 
no doubt, due to the fact that the outlook for practical success, 
considering the poverty of the country and the novelty of the 
idea, was very doubtful. 

Underwriters' Agreements Before the Revolution. 

The insurance partnerships, or so-called "companies," in 
Boston had, no doubt, been established after similar enter- 
prises in Philadelphia, dating from 1757. There also an effort 
to organize a company had failed (as fail it had to, because of 
the prohibitory Act of 1720), but a branch office was estab- 
lished in New York on August 21st, 1759, which illustrates the 
viewpoint common to the period, that in all matters of trade, 
including insurance, State lines were not a hindrance to the 
greatest possible development. Nor was there much need of 
apprehending a conflict with some other Provincial authority, 
since all insurance was transacted simply by conforming to com- 
mon law principles designed to protect the public against fraud. 
The first combination, more or less in the nature of restraint 
of trade in insurance, including the "fixing" of rates, was 
perfected in Philadelphia as early as Feb. 12, 1762, and many 
similar arrangements for the protection of the underwriters were 
entered into from time to time, all being more or less ineffective 
on account of increasing competition. In 1762 it was again pro- 
posed to organize an insurance "company" in Philadelphia, but 
nothing came of the effort. In 1766 a very suggestive arrange- 
ment was entered into by the several industrial undertakings 
of Philadelphia and in 1774 a "New Lloyds Institution" was 



* Journals of the Continental Congress, published by the Library of 
Congress, Worthington C. Ford, Editor, Washington, 1909, Vol. XIV, 
p. 520. 

177 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

established, no doubt in opposition to, but largely on the plan 
of the Lloyds of London. 

Effect of War Upon Premium Rates. 

The first meeting of the Continental Congress (Sept. 4) 
this year put an end to all hopes of a peaceful settlement of 
the difficulties with the mother country, and insurance rates 
rapidly increased, particularly in the seacoast towns. The 
effect of war on fire insurance premiums in New York is evi- 
denced by the statement that "We do not so much as think 
of shipping anything to anybody till we see affairs wear a very 
different aspect; indeed, all our other friends with you posi- 
tively forbid us to ship a single article until further orders, 
and seem much surprised that they have any goods coming. 
Twelve Guineas per cent, premium is now given here to insure 
goods at New York from fire and the enemy till 1st of April 
next, and Twenty Guineas per cent, have been given to pay 
a loss, if our troops are not in possession of New York the first 
of this month, and we have every appearance of a French and 
Spanish war."* But, of course, the chief effect of the war was 
upon the insurance premium upon shipping, which often reached 
prohibitive proportions. The Government was concerned with 
other matters than insurance; even if the business had called 
for such attention, the transactions were of too limited an 
extent to merit much consideration as a possible source of 
taxation. When, therefore, the Constitutional Convention met 
in 1789 insurance was about the last and the least demanding 
inclusion in the deliberations of that body, being thought of, 
no doubt, as a mere incident of general trade, although at least 
three of the delegates to the Convention were personal under- 
writers, t The commerce clause, as finally adopted, in admir- 
able terms, comprehended all the instrumentalities of commerce, 
then in use or subsequently to be developed, and while not 
specifically mentioned, as a needless qualification of a general 

* Fowler, History of Insurance, p. 31. 
t Ibid, p. 40. 

178 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

principle, insurance (in view at least of what has here been 
written) was undoubtedly understood by the framers of that 
instrument to come within the meaning and scope of the 
commerce clause.* 

Insurance at the Time of the Constitutional Convention. 

The foregoing account of the origin and development of 
American insurance practice, law and institution, to the year 
of the Constitutional Convention in 1789 is a full and complete 
refutation of the wholly unwarranted statement in the 
Report of the House Committee on the Judiciary upon 
the Regulation of Corporations and the constitutional 
aspects of insurance regulation by the Federal govern- 
ment. In that report it is stated that "Insurance is 
not some new matter, developed after the Constitution was 
adopted, like railroads and telephones and things of that kind, 
but insurance was well known long before the Constitution 
was adopted and insurance companies were in active operation 
in this country long before the adoption of the Constitution, 
and ever since the adoption of the Constitution it has not been 
considered as an article of commerce." There were no insur- 
ance corporations in 1789, nor could there have been on account 
of the Act of 1720, which distinctly forbade their formation in 
the colonies, and it was wholly improbable that such corporations 
should have come into existence during the trying times of the 
Revolution, when men had other things to do than experiment 
in new fields of finance, or engage in even quasi-public enter- 
prise of this kind. The Committee on Judiciary of the House 
of Representatives had, therefore, no evidence to support the 
statement just quoted but upon which they rest in part at least 

* The fullest discussion of the whole question of insurance as an ele- 
ment of commerce within the meaning of the commerce clause of the 
Constitution, is to be found in Papers and Addresses of John F. Dryden, 
President of the Prudential Ins. Co. of America, Newark, N. J., 1910, 
Chapter XIX; see also the Argument for Federal supervision of insur- 
ance, prepared for the Senate Committee on Judiciary, by Richard V. 
Lindabury, of Newark, N. J. 

179 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

their argument that insurance is not within the meaning of the 
commerce clause. The Supreme Court decisions, to which 
subsequent reference will be made, seem to have no con- 
clusive bearing upon the question whether the business of 
interstate insurance, which now constitutes 82% of the 
existing amount of life insurance contracts in force in the United 
States is within the meaning of the commerce clause of the 
Constitution or not. The Supreme Court never considered 
this particular question, which is separate and distinct from 
the cases which have been decided and it would be an abject 
surrender of legislative authority on the part of Congress to 
hold that Congress cannot rightfully legislate upon the subject, 
leaving it of course to the Court to decide whether such legis- 
lation would be constitutional or not. The whole history of 
the business of insurance is, in fact, opposed to the theory that 
insurance is not commerce or an element of commerce by the 
common consent of the commercial nations of the world. 

Beginning of Corporate Insurance Enterprise 
in America. 

Insurance companies in America, properly to be so-called, 
as distinct from the four associations (all limited to Phila- 
delphia) which have been referred to, did not come into existence 
until 1794, or five years after the adoption of the Constitution. 
A number of persons interested in or familiar with insurance 
principles had hoped to carry a tontine and annuity proposi- 
tion into effect, and which at the time was attracting some 
public attention. They, therefore, organized in 1792 the Uni- 
versal Tontine, and contemplated, no doubt, to transact business 
in all the states then constituting the Federal union. The 
originators of this plan included citizens of Philadelphia and 
Boston and the scheme was based upon the idea of the Boston 
Tontine Association, established in 1791, which also failed of 
its original intent and ultimately became a State Bank (the 
Union). A similar proposition in New York also came to noth- 
ing, but out of the plan of the Universal Tontine, which, as 
180 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

the name implies, purposed to be national or general in its 
scope, developed the Insurance Company of North America, 
which also, as its very name proves beyond the peradventure 
of a doubt, intended to become a national institution and not a 
local trading concern — national and commercial and unequiv- 
ocally within the meaning and the scope of the commerce clause 
of the Constitution, adopted but three years before. 

The organization of this company (which is still in a very 
flourishing condition, after 117 years) was completed in the 
same room of Independence Hall, in which 16 years before the 
Declaration of Independence had been adopted and while yet 
a mere organization and without a charter and not even certain 
of obtaining one, it was proposed by the 8th Article of Asso- 
ciation "to make such insurance upon vessels and merchandise 
at sea or going to sea, or upon the life or lives of any person 
or persons, or upon any goods, wares, merchandise, or other 
property gone, or going, by land or water; at such Rates of 
Insurance or Premium as they shall deem advisable." The 
first policy of insurance issued contained the phrase "and it 
is agreed by us the assurers that this writing or policy of insur- 
ance shall be of as much force and effect as the surest writing 
or policy of insurance theretofore made in any of the United 
States or elsewhere." 

First Insurance Legislation in the United States. 

The plan for the new organization was received with much 
public approval and steps were taken to procure a charter, 
and in the meantime business was commenced at once. A Bill 
was accordingly introduced into the Legislature of Pennsyl- 
vania, dated April 2, 1793, which is the earliest authentic date 
on record of legislative action in America since the adoption 
of the Constitution towards creating an insurance corporation 
as a trading concern. The act reads in part "Whereas a com- 
pany has been formed in the city of Philadelphia and a com- 
petent capital thereto subscribed for the purpose of carrying 
on the business of insurance and application has .been made 

181 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

to the Legislature by the said company for an act of incor- 
poration. In order therefore to promote an institution which 
by alleviating the risks and losses incident to trade and navi- 
gation must in its operations be equally beneficial to the agri- 
cultural and commercial interests of the state, etc." 

In anticipation of opposition in the Legislature to the 
granting of a charter, which many supposed w T ould confer 
monopolistic powers and privileges equal to those of the two 
London Companies, a carefully framed petition had been pre- 
sented to the Legislature under date of Dec. 18, 1792, which 
in part read as follows: 

"That your petitioners, attached to the public welfare, be- 
hold with the greatest satisfaction the commercial pursuits and 
interests of the United States becoming daily more numerous 
and important; but they have long regretted that, for want of 
sufficient number of underwriters of responsibility :n the prin- 
cipal cities and towns of the United States, commerce is Bur- 
thened with the charge of commissions to European correspon- 
dents for effecting insurances, and large sums of money are 
consequently drained from the country." 

In continuation it was said: 

"That your petitioners humbly conceive that considerable 
benefits will result from this association as well to the citizens 
of this commonwealth in general, as to the mercantile part of 
this community in particular, by retaining in the state the 
money invested in their capital stock and the large sums that 
must otherwise be drawn from the country for premiums of 
insurance, by relieving commerce from the present tribute paid 
to foreign underwriters, and by securing the assured through 
the means of an ample capital stock from a possibility of loss, 
which in the manner of making insurances heretofore practiced 
both frequently happened through the failure of individual 
underwriters." 

State Recognition of Insurance as an Element of 
Commerce. 

The references to the benefits resulting to commerce from 
insurance are extremely suggestive, particularly when taken 
182 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

into consideration with similar implications in the Bill itself. 
The opposition consisted chiefly of individual underwriters, 
whose interests, however, were briefly considered in the report 
upon the Bill made to the Legislature under date of March 1 1 , 
1793. In that report it is said 

"That no commerce or navigation could be beneficially 
conducted without insurance, no body chusing to commit con- 
siderable property to the ocean, without guarding against the 
numerous accidents to which it would be thereby exposed. 

That insurance cannot be so well conducted by individuals 
as by an incorporated company, for want of that identity that 
would enable such a company to be sued in case of loss, where 
justice could be had much more speedily than in suing every 
separate underwriter to a policy, a work of such immense 
expense and loss of time, as frequently to defeat entirely the 
object of insurance. 

That solidity is also to be considered, which it is impossible 
to attain with certainty with private underwriters, whereas this 
Company's proposed capital of 600,000 dollars in the public 
funds, will be a sufficient guarantee to those who employ them. 

That already the charges of insurance have been consider- 
ably abated since the establishment of this company, whereby 
a great saving to the mercantile body is effected, who can 
afford to give so much more for the produce, as they pay less 
for insuring it. 

That the number of persons underwriting in Philadelphia, 
does not at present exceed about fifty, and the risques they 
take, being on an average only about £200, on a single bottom, 
of course only about ^10,000 can now b^ insured at the dif- 
ferent offices here on a single risque, which occasions a drain 
of money for insurance to Europe, or to the neighboring States, 
very prejudicial to the body of this one. 

That it is not in the contemplation of the petitioners to 
exact or ask for themselves any exclusive privilege of insurance, 
so that those private underwriters, or any others, may still 
go on to insure, as heretofore, for those who will employ them; 
consequently that only a competition on a more enlarged scale 
will ensue very beneficially to the carrying on of the business 
in question. 

That in almost all commercial countries similar incor- 
porations exist; that in our own there are such for insuring 

183 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

houses from loss by fire, it would not be easy to shew why the 
present Company should not be incorporated on the same or 
like principles." 

Conformity to English Law and Precedent. 

Accordingly the Committee resolved to bring in the Bill 
referred to. The legislative history of the measure reveals 
much valuable information concerning views on the commercial 
aspects of insurance and the reasons for its ultimate passage 
as an act conducive to the advancement of trade. As a com- 
promise, however, it was finally agreed to incorporate also and 
at the same time " The Insurance Company of the State of 
Pennsylvania," practically repeating the statute of 6 George 
I (1720), establishing by Royal Charter two insurance ex- 
ploitations at the same time, that is, the Royal Exchange and 
the London Assurance. The bill for the charter of the Insurance 
Company of North America was signed by Governor Mifflin 
on the 14th of April, and the bill for the chartering of the 
Pennsylvania company on April 18th, 1794. Thus came into 
existence the first two insurance companies, properly to be so 
called, in the United States of America. 

No Restraint upon Interstate Trade in Insurance. 

The business of the Insurance Company of North America 
at the outset was chiefly that of marine underwriting, which 
always has been and by its nature must be more or less inter- 
state and international in scope and character. The fire busi- 
ness at first was limited to the city of Philadelphia, but as early 
as 1795 the field was enlarged to a territory of ten miles around 
the city, which, of course, included a part of New Jersey. It 
gradually became the practice to issue policies in other places 
and the business was systematically extended from year to 
year. In 1807 upon a special request that the company ope- 
rate in Lexington, Ky., a committee was appointed to consider 
as to whether it would be to the benefit and prosperity to 
extend insurance against fire generally to other cities and towns 
184 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

in other states, and after this agents were gradually appointed 
throughout the country. A London company, the Phoenix, 
had likewise established agents through the different states and 
in neither case was it assumed to be necessary to obtain special 
legislative permission from the several states to transact an 
interstate business in insurance, any more than this, under the 
new Constitution, was necessary for the interstate development 
of business generally. The Phoenix had come to the United 
States in 1806, but it only remained for a few years, returning 
to the United States, however, in 1879. 

Insurance National in Scope and Operation. 

A record has fortunately been preserved of an advertise- 
ment of the Insurance Company of North America, published 
widely throughout the country at the time, dated February 
13th, 1796, in which it is stated that " The Insurance Company 
of North America [offer] to accommodate the publick throughout 
the United States with respect to insurance for fire, etc., etc." It, 
therefore, requires no further proof that the company assumed 
from the outset of its business operations that its field would be 
the whole United States and not the state of Pennsylvania, only 
and that its charter rights and privileges included the authority 
to do an interstate business. In this respect the company 
did not stand alone, for the next most important institution of 
its kind, the Massachusetts Fire and Marine, chartered under 
date of June 25, 1795, but operating under a charter limited 
to a period of twelve years, announced as early as September 
23d of that year that " The company will receive proposals 
for insurance from any of the cities of Massachusetts, New 
Hampshire, Rhode Island and Connecticut." There can, 
therefore, be no doubt but that the position of these early 
companies was from the outset in favor of a national, rather 
than a local, and interstate rather than an intrastate business, 
and they had no reason to think otherwise until state jealousy 
and retaliation brought about a condition of law and legis- 
lation properly described as interstate chaos. 

185 



origin and growth of law and legislation 

Advantages of Insurance Transacted by Corporations. 
The Massachusetts Fire and Marine Insurance Company 
had its origin in a petition to the Massachusetts Legislature 
in 1795, in which, among other forcible arguments in favor 
of insurance by an incorporated company, it was stated that 
" The early establishment and continuance of similar Insti- 
tutions in all parts of Europe may be produced as conclusive 
evidence of their beneficial effects. And Experience has taught 
that this species of Insurance must be performed by Com- 
panies, or corporate Bodies, having large and permanent 
Funds at immediate command, in order that the business may be 
carried to so great an Extent as to embrace any object that 
may offer, and still afford full Security to the Insured, without 
producing inevitable Ruin to the Insurers, in the greatest 
Losses that may probably take place." In answer to this peti- 
tion a carefully framed charter was approved by the Legis- 
lature, dated June 25, 1795, in which the name of the new 
company was given as " The Massachusetts Fire Insurance 
Company." 

Inception of State Supervision and Control 
in Massachusetts. 
The charter of the company required the capital to be 
invested either in the funded debt of the United States, or the 
State of Massachusetts, or of any incorporated Bank in the 
State, thus early establishing the important principle of limited 
legislative control over the investments of insurance companies' 
funds. It was further provided that "no proprietor or voter 
shall be entitled to more than ten votes," by which the Legis- 
lature asserted its right to control the management of an insur- 
ance company in the interests of the general public. The 
charter was for a term of only twelve years, emphasizing the 
importance placed upon legislative control of institutions of 
this kind and the right to terminate the existence of an insti- 
tution which might under certain circumstances prove con- 
trary to the public good. The principle of charter limitation 

186 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

may have been copied from the old Hamburg Marine Insurance 
Company , which from 1765 operated under successive charters 
of ten years' duration for many years. The national character 
of the Massachusetts company, as previously stated, was asserted 
from the outset, but as a matter of permanent record, the follow- 
ing advertisement, published under date of November 11, 1795, 
is given in full: " The President and Directors of the Massa- 
chusetts Fire Insurance Company, hereby give notice, That 
they shall not in future, confine their Business to the four 
Eastern States, but will receive Proposals at their Office, in 
State Street, and make insurance for any citizens of the United 
States, on Dwelling-Houses, Stores, and all other Buildings; 
and on Goods, Wares and Merchandise agreeably to their 
Rules and Regulations, as heretofore published. By Order 
of the Board of Directors, Samuel Cabot, Sec'ry. N. B. The 
Printers throughout the United States are requested to publish 
this Advertisement. Boston, Nov. 11, 1795." The advertise- 
ment conforms to the corresponding announcements of the 
Insurance Company of North America and indicates that com- 
petition, aside from other reasons, would suggest a national 
scope of operations as legitimate and within the charter rights 
and privileges of the company. 

The Boston Fire and Marine. 

The commercial aspects of the business are also clearly indi- 
cated in an early notice, dated "Fire Office," October 7, 1797, 
in which occurs the statement that "The Company insures on 
Estates held on Mortgage, or lease for years, and to accommodate 
Trade, on Goods for one month or more." But the business 
was small and in three years the company had written only 
1,096 policies. It is estimated that probably not over three or 
four hundred individuals had taken out fire insurance with the 
company during this period. To increase the insurance it was 
decided to add a marine branch and after the usual petition 
had been presented to the Legislature an amended charter 
was granted on the 13th of February, 1799, by which the name 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

of the company was changed to "The Massachusetts Fire and 
Marine Insurance Company." A similar petition having been 
presented the same year, praying for a charter to establish "The 
Boston Marine Insurance Company," both charters were granted 
at the same time, probably in imitation of the charter of two sim- 
ilar institutions in London in 1720 and in Philadelphia in 1794. 

Beginnings of State Supervision and Control in 1799. 

The Act under which the Massachusetts Fire and Marine 
Insurance Company was re-incorporated is of great historical 
value in connection with inquiries into the origin of insurance 
law and legislation in the United States of America. The new 
charter imposed additional requirements upon the company 
and among others the duty "That said Corporation previous 
to their issuing any Marine Policy of Insurance, shall publish 
in two of the Boston newspapers the amount of their actual 
Funds, the periods when the remainder will be paid, the greatest 
amount to be taken upon any one Vessel or house, and the 
risques they propose to insure against ; and they shall keep a fair 
printed copy thereof in some conspicuous place in their Office, 
and publish the same annually. And the Real Estate which 
said Corporation are authorized and empowered to hold and 
purchase for transacting the business of said Company, may 
be to the value of Twenty Thousand Dollars and no more." a 
further qualification was the limitation of the new charter to 
a period of twenty years and to this limitation was added the 
extremely significant requirement by Sec. 8, that "the President 
and Directors of said Corporation shall when, and as often as 
required by the Legislature of this Commonwealth, lay before 
them such a statement of their affairs, as the said Legislature 
may deem it expedient to require, and submit to an examin- 
ation thereon under oath." 

By this important section the principle of state supervision 

and control over the business of an insurance corporation was 

established, practically at the very beginning of corporate 

underwritings in the United States, and I cannot do better 

188 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

than quote the words of Mr. E. R. Hardy, who first called 
public attention to this remarkable document and who, in com- 
menting upon this particular provision, said "The section that 
perhaps of all others has had the most far-reaching results is 
number eight. It is not found in the original charter, but in 
that section there was planted the seed of that mighty system 
of insurance supervision which dominates the business not only 
in Massachusetts, but throughout the land; and whenever some 
one asks for the beginning of insurance supervision in Massa- 
chusetts, tell him February 13, 1799." 

Insurance Charters of Limited Duration. 

The charter of the Boston Marine Insurance Company has 
not been preserved in its entirety and there is some doubt as 
to whether the same contained the important provision of Sec. 8 
of the charter of the Massachusetts Fire and Marine. The Com- 
pany's charter, however, was also limited to twenty years. An 
early announcement of the business to be transacted makes it 
evident that the term "marine insurance" was construed in a 
broad manner, for it is said, " The President and Directors 
of said Company are now ready to receive proposals (at their 
Office in State-street, Boston, lately occupied by the Branch 
Bank) and to make insurance upon Vessels, Freight, and Goods ; 
and against captivity of persons ; and on the life of any person 
during his absence by sea; and in cases of money lent upon 
bottomry, and respondentia; not exceeding thirty thousand 
dollars, on any one risque." 

After these charters had been granted many similar cor- 
porations came into existence,, but no new principles of law or 
legislation may be said to have been developed additional 
to those stated to have been expressly set forth in the early 
charters of the Philadelphia and Boston companies. The 
chartered companies soon proved their superiority over the 
early forms of individual underwriting, which gradually fell 
into disuse and finally passed away, as no longer adapted to the 
more complex commercial conditions of the present time. 



origin and growth of law and legislation 

First Act of Congress on Insurance (1797). 
The earliest mention of insurance legislation by the U. S. 
Congress occurs in the Lex Mercatoria Americana, by George 
Caines, published in 1802. It is said in this work that " Neither 
by the acts of Congress, nor those of the different state legis- 
latures, are there any positive regulations of the formal parts 
of the instrument of insurance: but custom has shown what 
they ought to be; and, in what appertains to trade, let it be 
constantly remembered, that custom alone is a law." Congress 
had, however, as early as 1797, passed a stamp act conforming 
in its essentials to the stamp duties imposed by the stamp act 
of 1765. In referring to this act in a discussion of the necessary 
formalities required for the lawful completion of the insurance 
contract, Caines remarks that " the proper stamp constitutes 
with us, the last requisite; and without it, the policy is not only 
void, but unless made out and duly stamped within three days 
after the insurance, induces a forfeiture from the insurer of 
$20 for every offense." The stamp duty referred to was enacted 
at the first session of the fifth congress (Chap. II, sec. 4) on 
July 6, 1797, and the act reads in part as follows: 

" From and after the 31st day of December next there 
shall be levied, collected and paid through the United States 

the several stamp duties following, to wit: any 

policy of insurance or instrument in the nature thereof, whereby 
any ship c , vessels or goods, going from one district to another 
in the United States, or from the United States to any foreign 
port or place, shall be insured, to wit; if going from one district 
to another in the United States, 25 cents; if going from the 
United States to any foreign port or place, when the sum for 
which the insurance is made shall not exceed $500, 25 cents; 

and when the sum insured shall exceed $500, $1.00 

Any certificate of a share in any insurance company or any 
certificate of a share in the Bank of the United States, or of 
any State or other bank, above $20, and not exceeding $100, 
10 cents; above $100, 25 cents; and for any certificate for every 
such share under $20 at the rate of 10 cents for $100, etc." 

' ■ Section 3 of this Act provided, "And, be it further enacted, 
that all deeds and writings whatsoever, or the payment of any 

190 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

sum of money, upon the contingency of the loss of any ship, 
or goods, laden or to be laden on board of any ship, or of dam- 
age thereto, within this Act chargeable with the several rates 
of duty hereinafter mentioned.' 

Power op Congress to Supervise and Control. 

There are a number of additional references to insurance, 

penalties, etc., in the act, but the most important of these is 

section 9, which, by implication at least, suggests the power 

of congress to supervise insurance companies and which reads: 

"And, be it further enacted, that the several duties afore- 
said shall be levied, collected, received and accounted for, 
by and under the immediate direction and management of the 
supervisors and inspectors of the Revenue and other officers 
of inspection, subject to the Superintendent's control and the 
direction of the Treasury Department, according to the respec- 
tive authorities and duties of the officers thereof." 

The act was limited to a duration of five years, but the 
exact date of repeal is somewhat doubtful. It is quite probable 
that the duties were continued in force by subsequent acts 
providing for a general stamp office, dated March 3, 1801 
(Chap. XIX) and August 2, 1813 (Chap. LIII). No reference 
to the act of 1797 occurs in any of the writings on American 
insurance law and legislation, and the same seems to have 
escaped entirely the learned commentators, nor is there any 
reference thereto in the debates of congress leading to the 
enactment of the stamp duties imposed upon insurance com- 
panies during the Civil War. 

Development and Growth of American Insurance Law. 

Near the close of the 18th Century the business of insur- 
ance in the United States was still of very small extent and 
practically limited to the large seaports of the North Atlantic 
coast. Gradually, however, the practice of American under- 
writing assumed a definite character of its own and the in- 
creasing number of chartered corporations for the transaction 
of an insurance business naturally directed attention to the 

191 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

state of the law and the required special legislation. The 
decisions of Lord Mansfield governed in most of the early 
cases and Park's classical treatise on the Law of Insurance, first 
published in London in 1786, had been issued in several Amer- 
ican editions by 18 10, when the great work on Insurance Law 
by Samuel Marshall came out in an American edition by Condy, 
considered by most of the writers on the subject of superior 
merit to the original, first published in London in 1786. The 
early development of American insurance law may be traced 
in the various American cases cited by Kent in his Commen- 
taries, first published in 1826, but one of the most suggestive 
occurrences was the veto of the Council of Revision of the 
State of New York, under date of April 6th, 1807. A bill had 
been introduced entitled "An Act to restrain insurance of 
lottery tickets and for other purposes" and after having been 
referred to the Council of Revision (long since abolished) the 
following objection was made by Kent, Chief Justice, on the 
ground that the bill was inconsistent with the public good and 
the Constitution, because by its last section the bill declared "it 
to be unlawful for any company not incorporated by the laws 
of this State, or of the United States, or any private individual 
not residing within this State, to set up and keep within this 
State, by their agent, or otherwise, any office to insure houses 
or goods against fire, or vessels or merchandise against mari- 
time losses, and that every such insurance shall be void, and 
every person receiving any premium therefor shall forfeit double 
the amount thereof." The Chief Justice argued that "This 
provision is inconsistent with the second section of the fourth 
article of the Constitution of the United States, which declares 
that ' the citizens of each State shall be entitled to all privileges 
and immunities of citizens in the several States.' This inter- 
community of privilege secured to the citizens of the several 
States applies to their personal rights and immunities, and among 
others, to the free right to exercise trade and commerce."* 

* The question involved in this controversy is quite fully discussed 
in the Special Message of Gov. Morgan Lewis, in 1807, printed in full 
192 



origin and growth of law and legislation 

Freedom of Trade and Contract in Insurance. 

In continuation, upon the general merits of the bill, Kent 
pointed out that, "The bill is repugnant to the general good, 
A contract of insurance, when founded on a substantial interest, 
and not perverted to gambling purposes, is one of the most 
useful species of contracts which arises in the whole course of 
commercial transactions . It ought to be left freely to be made, 
and not placed under the restrictions of a monopoly. If a 
company or an individual in another State will insure upon 
more reasonable terms, or possesses a sounder credit, or a more 
prompt disposition to adjust losses than any with us, why 
should a citizen of this State be denied the privilege of obtain- 
ing such insurance? And if his privilege to do so is admitted 
to be entire and perfect, why should a legal embarrassment 
be thrown in his way by prohibiting such insurances through 
the means of an agent here? It is a plain and most convenient 
rule of law, that all contracts are equally valid when made by 
an authorized agent as when made by his principal; and this 
rule ought not to be set aside, without some important object 
which is cogent in its reason and general in its application." 

It is a remarkable fact that this extremely suggestive 
opinion, in favor of free intercourse between the states in mat- 
ters of insurance as an element of commerce should never have 
been referred to by anyone who has written on the subject. 

Retaliatory Legislation and Interstate Conflict. 

The subsequent history of this effort is rather obscure. 
A similar law had been passed in Pennsylvania and in 1829 
the Legislature of New York prohibited marine insurance, or 
lending on respondentia or bottomry, effected within the State 
"to all persons and companies residing in any foreign country 
acting by an agent here." According to Kent, "Persons and 
associations in other States effecting such insurance in New 

in Vol. I of the " Messages from the Governors," re-published by author- 
ity of the State of New York, Albany, 1909, p. 613. 

193 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

York were taxed ten per cent, on their premium" and the 
same check or prohibition applied to insurance against fire in 
New York. Thus the doctrine of prohibitory, retaliatory, or 
discriminating legislation on insurance, first enunciated by 
Count Phillip of Burgundy in 1458 is even in this country 
over eighty years old at the present time. Kent, however, 
remarked with regard to Massachusetts in this respect, that 
the law in that State was "more liberal and it allows, by the 
Act of 18 16, corporate insurance companies in other States 
and in foreign countries to insure by their agents upon com- 
pliance with certain conditions intended to guard against abuse." 
Legislation of this kind naturally increased with the growth 
of the business and new laws were called for by the separate 
organization of life insurance companies of which the first were 
the Pennsylvania Ins. Co. for the Insurance of Lives, estab- 
lished in 1 8 14, and the second the Massachusetts Hospital, 
established in 18 18. Of these two interesting institutions no 
full historical account has been preserved, but it may be stated 
as a fact that from the beginning they were the subject of 
special solicitude on the part of the States from which they 
derived their charters as moneyed corporations accumulating 
large funds upon long deferred contractual obligations. 

Gradual Increase in State Legislation. 

The principle of accountability had been laid down in the 
charter of the Massachusetts Fire and Marine in 1796. Charters 
were not easily granted and as early as 1823 a memorial was 
presented to the New York Legislature praying for the incor- 
poration of an insurance company, which had evidently failed 
to secure a charter at a previous session of the Legislature. 
The business was rapidly growing and in 1825 a "Statement" 
was published of "all insurance companies in the State with 
the amount of capital stock authorized and amount actually 
paid in, amount of tax assessed stock, etc.," followed in the 
same year by a "report" upon supposed violation of their 
charters by certain insurance companies, and a report of the 

194 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

Attorney- General on " questions affecting the right of the 
Legislature to alter, modify, or amend any act incorporating 
an insurance company." There was a further report this ses- 
sion of a select committee on the subject of banks and insur- 
ance companies, all of which may be considered proof that 
the business of insurance, at a time when by modern standards 
only a limited amount was actually done, was considered semi- 
public in character and fully within the supervising and regu- 
lating powers of the State Legislature. 

Required Publicity and Statistical Returns. 

In 1827 the Comptroller of the State of New York made 
a report on the capital employed in banking, insurance and 
manufacturing companies in the State and the amount of tax 
assessed upon the same and from 1830 onward annual returns 
were required of all insurance companies chartered by the 
State, until the year i860 when an insurance department was 
established with full power of supervision and control. 

Growth of the Insurance Business. 

The evolution of insurance law and legislation in other 
states has been much the same. Out of crude beginnings a 
most elaborate system of supervision and control has slowly 
developed, until a point has been reached when a large part of 
the business, particularly the life branch, has practically become 
public in character, with a more or less implied guarantee on 
the part of the State for company solvency and guarantee of 
good faith. Most of the early chartered companies were out 
of existence fifty years after. A return prepared in 1861 showed 
that out of 336 insurance corporations chartered by that year 
only 114 were still in existence. Of 23 companies chartered 
before 1810 only one remained active in 1861. The Massachu- 
setts Fire and Marine, established with so much difficulty in 
1795 had its charter revoked in 1848. The rapid rise of the 
whale fishery in Nantucket accounts for the establishment of 
the Nantucket Ins. Co. under date of June 21, 1804, and of the 

195 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

Phoenix Ins. Co. of Nantucket under date of June 12, 1818. 
The first named ceased to do business in 1832 and the second 
in 1838. How the Boston Fire and Marine, established in 1799, 
came to an end is not officially known. The Newburyport 
Fire and Marine, established in 1799 came to an end in 1832, 
and the Salem Marine, established in 1800, ceased business in 
1839. All of these cases illustrate the difficulty of success in 
insurance enterprise. The rise of commerce gave birth to many 
of these institutions and the decline ended their career. In no 
case is this better illustrated than 'in that the two Nantucket 
companies, wmich flourished with the whale fishery and ended 
with the decay of that remarkable industry in one of the his- 
torically most interesting localities in America. 

Massachusetts Requirements of 1807. 

The first statutory requirement of Massachusetts on the 
subject of insurance appears to have been a Resolve of 1807 
under which insurance companies were to render an account of 
their affairs to the next General Court. This Act called for a 
statement of capital paid in, the character and amount of 
the funds in which the same was invested and the amount 
of outstanding risk — in other w T ords, all the essential facts 
disclosing the business transacted by the companies. A con- 
solidated account of the returns required under this Act and 
made from 1816 to 1866 was published in the insurance report 
for that year. In 181 8 an Act was passed defining "the power, 
duties and restrictions, of insurance companies." This was 
probably the first general law on the subject of insurance enacted 
in the State of Massachusetts, but the Act would seem to have 
applied only to the companies transacting a marine insurance 
business. The Act provided in part that "All Insurance Com- 
panies which shall hereafter be incorporated under the author- 
ity of this commonwealth shall have power and authority to 
make insurance on vessels, freight, money, goods and effects 
and against captivity of persons and on the life of any person 
during his absence at sea and in case of money lent upon bot- 
196 



ORIGIN AND GROWTHi t OF LAW AND LEGISLATION 

tomry and respondentia and to fix the premium and terms 
of payment." * 

It was further provided that "such companies shall 

publish in two newspapers printed within this commonwealth, 
one of which at least shall be in the town of Boston, the amount 
of their stock, against what risk they desire to insure, and the 
largest sum they mean to take on any one risk." Other pro- 
visions of the Act required them, whenever directed by the 
Legislature, to submit statements of their company affairs to 
that body and to be examined concerning them under oath; 
also forbidding them to write on any one risk a sum exceeding 
10% of the capital stock of their respective company. In 
other words, the modern theory of supervision, examination, 
control and publicity was fully developed in all its essentials 
nearly one hundred years ago and the Massachusetts Act of 
1818 merely carried into effect the principle of visitorial power 
included in the amended charter of the Massachusetts Fire 
and Marine Ins. Co. of 1795. 

First Law on Fire Insurance in Massachusetts. 
In 1820 an act was passed in Massachusetts granting spe- 
cific authority to the several insurance companies in the State 
to insure against fire, which was the first general law on the sub- 
ject of fire insurance, such authority having, up to that time, 
been granted only by specific charter. The most significant 
phrase in the wording of this act is that authority is granted 

to the companies to make insurance against fire 

upon property within the United States" It would seem at 
least that State boundaries were not considered a hindrance to 
the widest development of the insurance business at this time 

Legislation Concerning Dividends and Annual Returns. 
In 1836 a report was made to the Massachusetts Legisla- 
ture on the regulation of time of paying insurance dividends. 
In 1837 a report was made favoring annual returns of insurance 
*2istMass. Ins. Rep., p. 201. 

197 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

companies with power to enforce this requirement. Insurance 
supervision, properly to be so called, may, therefore, be said to 
date from this year and between 1839 and 1866 statistical 
returns were made, which afforded a fairly complete view of 
the business of the companies during this period. That the re- 
turns were more or less objectionable to some of the companies 
is made evident by a petition presented to the Legislature in 
1847 "against laws requiring insurance companies to make 
annual returns of transactions," followed in 1848 by a remon- 
strance signed by C. W. Cartwright against the injustice of re- 
quiring insurance companies to make annual returns. More was 
apparently demanded of local institutions than of the companies 
of other states, for in 1854 a petition was presented to the Leg- 
islature asking that foreign insurance companies should make 
as full returns to the State as State companies. In 1856 a pro- 
test was made to the Legislature against insufficient insurance 
capital in the State to meet wants of commerce, followed by a 
recommendation that the Legislature charter one or two respon- 
sible marine insurance companies with large capital to relieve 
requirements. 

Establishment of First State Insurance Department. 

An Act had been passed in 1852 under which the Secretary, 
the Treasurer, and the Auditor of the State, were constituted a 
Board of Insurance Commissioners, charged with certain lim- 
ited duties, and this office was continued under the codified 
statute of 1854, but it was not until the year following that a 
regularly organized and equipped Insurance Department was 
established, also, however, with the title "Board of Insurance 
Commissioners — the Board consisting of three members, ap- 
pointed by the Governor with advice of his council. The Act 
is quite an elaborate document of ten sections. The Act pro- 
vided, inter alia, that "The said Commissioners, or any two of 
them, at least once in every two years and as much oftener 
as they may deem expedient shall visit every insurance company, 
of whatever description, which has been or may hereafter be 
198 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

incorporated by authority of this commonwealth and shall 
have free access to their books and papers and shall thoroughly 
inspect and examine into all the affairs of said companies and 
make any and all such inquiries as may be necessary to ascer- 
tain the condition of said corporations and their ability to 
fulfill all the engagements made by them and whether they 
have complied with the provisions of law applicable to their 
transactions," etc., etc. 

By this Act the modern American system of State super- 
vision came into existence in the year 1855, an d to Massa- 
chusetts in this, and in so many other legislative reforms, belongs 
the credit of having made the best possible beginning so that 
other states could safely follow. Historical accuracy requires 
that mention should be made of the appointment of Insurance 
Commissioners by the Governor of New Hampshire as early 
as 1850 and the publication of abstracts of returns for the two 
years ending with 1851, followed by the publication of annual 
reports from 1852 onward to date. The first annual report of 
the Massachusetts Department was not published until 1855, 
but it is to Massachusetts that the nation is indebted for the 
modern system of State supervision, and not to New Hamp- 
shire. 

Development of the State Supervisory Function. 

In some of the states, the Auditor, State Treasurer, or some 
other fiduciary officer has been charged with general super- 
visory power, previous to the establishment of regularly organ- 
ized special departments. In Vermont, the Secretary of State 
and the State Treasurer have been Insurance Commissioners 
since 1852. New York established an insurance department in 
i860, and Connecticut and Indiana in 1865. California fol- 
lowed in 1868 and Missouri in 1869. In that year the Insurance 
Commissioner of New York could say in his annual report that 
"Government supervision of insurance companies is now an 
established feature in State government — New York, Massachu- 
setts, California and Missouri have separate officers and distinct 

199 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

departments of their executive government organized especially 
for this purpose." In 1870 many more states followed and to- 
day every state and territory has a more or less completely 
organized department for the supervision and control of in- 
surance orporations. 

Over-Legislation and Interstate Chaos. 

The growth of the principle of State duty and responsi- 
dility in determining and maintaining the contractual rela- 
tions of parties to the insurance contract and the safe, sound 
and proper administration of insurance corporations has natur- 
ally been of a most varied character in the different states, and 
within the last generation an immense mass of legislation on in- 
surance has been enacted, much of which is conflicting, contra- 
bictory and uncalled for. The amount of law and legislation 
no the subject of insurance has been so considerable, partic- 
ularly during recent years that no summary account would do 
the matter justice. The simple but effective statutes of an 
earlier day, when the business was small and the companies 
few, have been replaced by drastic regulating statutes, which 
in some cases amount to state management and practically 
make the State responsible for the final outcome of much of 
what is called insurance companies, experience. The states 
to-day fix all the fundamental conditions upon which at least 
the life branch of the business is conducted, the rate of mortal- 
ity, the rate of interest and even the expense rate. The State 
upon this assumption of arbitrary authority commits itself 
to the doctrine of state responsibility with all that is involved 
in that doctrine considering the magnitude and growth of 
the business and its probable much greater magnitude in the 
future. Of insurance corporations, however, it is true, as of 
all state chartered corporations, that what the State has cre- 
ated the State may destroy. As well said by Davis, in his 
treatise on the origin and development of modern corpora- 
tions, " The great fact of the history of the old corporations 
is that the state has wholly or partially absorbed their powers. 

300 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

To such extent as the social activity of the surviving corpo- 
rations has been supplemented in response to greater public 
demands, it has been done almost entirely through the medium 
of new institutions, created, maintained and administered 
by the State, and not through new corporations. The absorp- 
tion of the powers of a corporation by the State does not imply 
merely the resumption of powers previously granted by it; 
some of the powers may have been inoperative, when granted 
from lack of subject-matter on which to have effect; on the other 
hand, it does not follow from the absorption of corporate powers 
by the state that the state continues to exercise them as the 
corporation has previously done; they may be allowed by the 
state to lie dormant under the influence ot political theories 
repugnant to their exercise," and in continuation, "As an in- 
dustry becomes more public in character, it is elevated in pop- 
ular estimation above the owners of it and in a sense is separated 
from them, — it is idealized or personified. It appears to have 
rights and duties in itself, distinct from those of its owners. 
Is that not the same movement that resulted (in a somewhat 
different field) in the development of the legal conception of 
the "ideal personality" of municipalities? The law regards the 
capital invested in it as "clothed with a public trust," by virtue 
of which its owners have only a limited control of it; its patrons are 
regarded as entitled by law to the benefit of its services in 
return for a reasonable compensation. It is the increased 
dependence of men on physical things, grouped in great units 
such as systems of railway, telegraph and water works, that 
has contributed in a large measure to the growth of corpora- 
tions." And finally, by the same writer, "It is beginning to 
be recognized that more government is necessary under the 
developed conditions now attained by society than under the 
comparatively simple conditions prevalent a century ago, — 
and that such increased government has actually been provided, 
not by the state but by corporations. The plain tendency to 
corporate life at present, in its relations to the state, is in the 
direction of subjection and submission to close supervision 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

In history the state has never been satisfied with the mere 
supervision of corporations by commissions or otherwise; 
it would be against the teachings of history to expect that 
now the state will stop short of the complete absorption of the 
governmental features of corporations." 

Conflict of Law and Need of Uniform Legislation. 
The common law of insurance in America to-day is practi- 
cally what it has always been and the doctrine of insurable 
interest governs still with the same force as when the gambling 
acts were first passed in 1754 and in 1774. It has been estimated 
that over 30,000 American insurance decisions* have been ren- 
dered by the courts and that 12,000 of these have been fought 
clear through to the highest tribunal during the last twenty 
years alone. According to the Legislative Index over 1,200 
specific laws pertaining to the business of insurance were 
enacted during the nine years ending with 1908 and, according 
to the Hon. John F. Dryden, the present statutory requirements 
on the subject of insurance would constitute a volume of over 
five thousand printed pages. Early law and legislation on 
insurance has been forgotten, but the principles remain the 
same. Early law governed in all the essentials and left sufficient 
contractual corporate freedom to conduct the business in har- 
mony with the law of social and economic development or 
growth. Out of the common law doctrine that insurance con- 
tracts shall not be contrary to public policy and that the rights 
of the respective parties shall be fully protected by the courts 
has slowly developed the modern doctrine of state supervision 
and control over insurance contracts and insurance corporations. 
The future of the business may be viewed in the past. There 
will not be less regulation but more, not less visitorial power 
of departments but more, not less publicity of facts and expe- 
rience but more, until the corporations will serve, as completely 
as the nature of the business permits, the higher purposes 
and needs of the state. 



* Law of Insurance, by Geo. Richards, 3d Ed., N. Y., 1909, p. xi. 
202 



origin and growth of law and legislation 

Insurance as a Branch of Legal Science. 
A whole century has passed since the first American insur- 
ance corporation came into existence, and not only has there 
been an enormous increase in the extent of the business itself, 
but an immense addition has been made to the law of the 
subject. Willard Phillips was the first to publish a complete 
treatise on the law of insurance as based upon American ex- 
perience, and the value of the work is indicated by the fact 
that a second edition was published in 1834 and a new two- 
volume edition in 1840. In a brief preface to the first edition 
Phillips assigned to insurance its proper place as a science in 
the remark that "No branch of law can more properly be de- 
nominated a science, than insurance; and since this contract 
is substantially the same in different countries, and continues 
to be the same now that it was formerly, the decisions of courts, 
whether ancient or modern, and the opinions and reasonings 
of writers, whether American, English, Italian, or French, 
are equally applicable to it." 

Kent's Commentaries on Insurance as a Branch of 

Commercial Jurisprudence. 
No one, however, did more to raise the dignity of insurance 
law to a separate branch of legal science than James Kent, 
who, in his Commentaries, first issued in 1826, gave painstaking 
attention to every branch of the business, with a full account 
of the ancient foundations of insurance contractual law. He 
traced, in particular, the connection between the insurance 
law of England and the American Colonies to the early law and 
practice after the peace of 1783, holding that "During the 
colonial government of this country, as well as for the first 
fifteen or twenty years after the peace of 1783, the business of 
insurance was almost entirely carried on by private individuals, 
each taking singly for himself, and not in solido, a risk to the 
amount of his subscription. But incorporated companies 
began to multiply and supplant private underwriters, and 
the business of insurance in the United States is now carried 
203 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

on almost exclusively by incorporated companies." Points 
of divergence are carefully pointed out and emphasized by 
moral reflections, which may well be read to advantage even 
at the present day. Thus, in regard to insurance as an aid 
to illicit trade, Kent pointed out, "It is certainly matter of 
surprise and regret, that in such countries as France, England, 
and the United States, distinguished for a correct and en- 
lightened administration of justice, smuggling voyages, made 
on purpose to elude the laws, and seduce the subjects of foreign 
states, should be countenanced, and even encouraged by the 
courts of justice. The principle does no credit to the commer- 
cial jurisprudence of the age." 

Utility of Insurance to Commerce and Navigation. 

This reference to insurance as an element of commerce 
was not accidental, for in many other parts of the Commentaries 
Kent re-emphasized the commercial aspect of insurance trans- 
actions. The following suggestive statement is sufficient to prove 
conclusively that in the mind of this, the foremost commen- 
tator on American law, the insurance contract and the insurance 
business were not to be considered separate and distinct from 
commercial law and legislation generally. " The business of 
uncovered navigation or trade would be spiritless or presump- 
tuous. The contract of insurance protects, enlarges, and stimu- 
lates maritime commerce; and under its patronage, and with the 
stable security which it affords, commerce is conducted with 
immense means and unparalleled enterprise, over every sea, and 
to the shores of every country, civilized and barbarous. Insurers 
are societies of capitalists, who are called by their business to 
study with profound sagacity, and with exactness of calculation, 
the geography and navigation of the globe, the laws of the ele- 
ments, the ordinances of trade, the principles of international 
law, and the customs, products, character, and institutions of 
every country where tide waters roll, or to which winds can 
waft the flag of their nation," 

204 



origin and growth op law and legislation 

Principles of Ancient Law in Modern Legislation. 
Every writer of authority on the subject of insurance 
previous to the decision of Paul vs. Virginia by the United 
States Supreme Court, that insurance policies are not articles 
of commerce within the meaning of the commerce clause of the 
Constitution, has emphasized the importance of insurance as 
an element of commerce and maritime navigation. Some of 
the most important principles of ancient insurance law have 
been incorporated into American law, and, for illustration, 
a rule from Le Guidon, the early French maritime code, of which 
it is said by Kent, that "It is understood to be a fixed rule, 
that if the ship be so injured by perils as to require repairs to 
the extent of more than half her value at the time of the loss, 
the insured may abandon; for if the ship or cargo be damaged 
so as to diminish their value above half, they are said to be 
constructively lost. The rule came from the French law, and 
is to be found in the treatise of Le Guidon, where it is applied 
to the case-of goods; and in respect to both ship and cargo, the 
rule has been incorporated into the American jurisprudence."* 
No authority, on the law of insurance, has failed to lay stress 
upon the commercial importance of insurance and among others 
Duer, by far the most learned of our American writers on the 
law of insurance, in his treatise published in 1845, in various 
parts of his work fully sustains this important connection. 

Considerations of Federal Supervision and Control. 
The conclusion that insurance is an element of commerce 
or an instrumentality thereof is fundamental to all efforts to 
broaden the scope of insurance law and legislation by making 
the interstate transactions of American insurance companies sub- 
ject to Federal supervision and control. In a still broader sense 
the business is international and for nearly a thousand years 
some of the most important principles of maritime law relating 
to the insurance contract have been the same among the trading 
nations of the earth. By its nature the insurance business is 

* See Kent's Commentaries, Vol. Ill, p. 329. 
205 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

national and international and to limit its development or hinder 
its growth as a beneficent social institution by mere arbitrary- 
considerations resulting from conditions of political expediency 
is to go contrary to the whole historical development of the 
fundamental principles which underlie the contract and the 
business of insurance as now carried on by corporate enterprise 
throughout the world. The ultimate regulation and control 
of interstate insurance transactions by Federal power is, there- 
fore the logical development of insurance law and legislation 
which from its origin has been practically co-incident with the 
insurance contract itself. It is true that the United States 
Supreme Court has repeatedly held that insurance policies are 
not transactions in commerce, but the cases which have come 
before the Court have never involved the momentous issue of 
declaring an Act of Congress providing for Federal regulation of 
insurance companies transacting an interstate business null and 
void. The first effort to bring about such Federal regulation ap- 
pears to have been made in 1853, when it was suggested that a 
convention of insurance presidents and actuaries "agitate for a 
more proper basis of taxation and agree upon a proper memorial 
to the Legislatures of all the States." for it was said, "it is 
desirable to have uniformity in these thirty-one sovereign 
States."* The effort was probably suggested by the Parlia- 
mentary investigation into Assurance Associations in England 
in 1853 and the movement to establish effective Insurance 
Departments in the more important Eastern States. The sug- 
gested convention did not materialize and nothing further seems 
to have been done until 1866, when the first bill providing for 
Federal regulation and control of insurance was introduced into 
Congress. This bill provided for a National Bureau of Insurance 
in somewhat the same manner as the new National Banking 
Act provided for the supervision and control of national banks, 
in place of the more or less insecure state banks of issue. The 
bill did not come up for discussion and did not become a law. 

* Lectures on the Science of Life Ins., by Jos. L. Knapp, Phila., 1853, 
P- 154. 

206 



origin and growth of law and legislation 

The Case of Paul vs. Virginia. 
Two years later a case was decided by the United States 
Supreme Court in which it was held that "issuing a policy of 
insurance is not a transaction in commerce" and "these con- 
tracts are not articles of commerce in any proper meaning of 
the word." This case of Paul vs. Virginia has become the 
rock foundation of the opponents of Federal supervision of 
insurance, as not being within the meaning of the commerce 
clause of the Constitution. The decision has governed in a num- 
ber of cases which have followed it and of which the most im- 
portant is that of Hooper vs. California, which was decided by 
the Supreme Court in 1895 and in which it was held "that the 
business of insurance does not generally appertain to such 
(interstate) commerce has been settled since the case of Paul 
vs. Virginia." From a careful reading of that first decree, how- 
ever, it does not appear that the same had reference to the 
business of insurance, but rather to only a single isolated trans- 
action incident thereto and that is the issuing of a policy of 
insurance. Surely the enormous business of insurance is more 
and means more than the issuing of policies! But so the Court 
decided and the doctrine was continued in the case of New 
York Life vs. Craven in 1900. The Court in that case held also 
that "we only repeat the business of insurance is not commerce. 
The contract of insurance is not an instrumentality of com- 
merce. The making of such a contract is a mere incident of com- 
mercial intercourse and in this respect there is no difference 
whatever between insurance against fire and insurance against 
the perils of the sea, and we add, or against the uncertainty 
of man's mortality." 

Constitutional Aspects of Insurance. 
These decisions notwithstanding, persistent efforts have 
been made to bring the business of insurance within the scope 
and authority of Federal law. Without passing upon the 
soundness of the Supreme Court decisions, as determined by 
methods of statutory construction which do not apply to general 

207 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

arguments, it may be pointed out that as far as known the 
briefs filed with the various cases referred to do not disclose 
that any of the evidence derived from an extended historical 
inquiry into the origin, purpose, law and legislation of insur- 
ance was taken into consideration in the disposition of the 
cases referred to. In due appreciation of what is common 
knowledge on the subject, and with a due regard to the actual 
facts of insurance as an element of everyday commerce and 
commercial life, the Supreme Court decisions are opposed to 
the unbroken chain of evidence from the very dawn of insur- 
ance to the present day, and the legal reasoning of all the fore- 
most authorities on the law of the insurance contract as an 
indispensable aid to the commerce of the past and the present 
day. In justice to the integrity and intelligence of those who 
have made the effort for Federal supervision, it is but right 
and proper that they should not be charged with having wil- 
fully disregarded the decisions of the Supreme Court as laid 
down in the cases referred to, but that they hold to the belief 
that the regulation and control of the interstate business of 
insurance companies now having attained to enormous propor- 
tions, is a matter totally different and distinct from the very 
limited transactions and very narrow considerations of law and 
fact involved in all the insurance cases before the Court from 
Paul vs. Virginia to Nutting vs. Massachusetts. 

Suggestions for Federal Supervision and Control. 

The various bills that have been introduced into Congress 
do not require to be discussed here in detail. A bill for the 
Federal incorporation of insurance companies had been intro- 
duced into Congress in 1868 and an effort was made in 1879, 
which did not materialize or cause the introduction of a specific 
bill. In 1892 Mr. John Patten, M. C. for Ohio (also President 
of the Union Central Life Ins. Co.), introduced a carefully framed 
bill for Federal supervision and control, followed in 1897 Dv 
a revised bill, introduced by Senator Piatt of Conn., and re- 
introduced in 1899. A very radical bill for Federal supervision 
208 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

and national control was introduced into the House by Mr. 
Morrell of Pa. in 1903 and two years later Senator John 
F. Dryden of N. J. (also President of the Prudential Ins. Co. 
of America) introduced a bill drawn with extreme care and 
modelled largely after the National Banking, Bankruptcy and 
other Federal Acts. The bill was re-introduced in 1906, but 
it never came up for public discussion. In fact, none of the 
bills introduced from 1866 to 1906 were ever publicly discussed 
by the Congress, but dropped by committees and shelved.* 

Errors Concerning the Early Status and Extent op 
Insurance in America. 

While the second Dryden bill was before the Senate the 
Committee on Judiciary of the House of Representatives made 
a report on the regulation of corporations, including insurance, 
from which the statement has previously been quoted that ''in- 
surance companies were in active operation in this country 
long before the adoption of the Constitution." (1789). The 
Committee held that the language of the Chief Justice in Mc- 
Culloch vs. Maryland was not applicable to the doctrine involved 
in the constitutional aspect of Federal regulation, but they said 
"perhaps the language quoted would be very apt if insurance 
had just been developed and discovered and recognized by the 
commercial world as commerce and would very properly belong 
to commerce. No one questioned but that all would concede 
that it would come within this definition of commerce as men- 
tioned in the Constitution." As a matter of fact and history 
and as fully brought out by this inquiry into almost neglected 
sources of insurance information, insurance was practically 
unknown and unused in the Colonies and the States previous 
to the adoption of the Constitution in 1789 and the first insur- 
ance corporation did not come into existence until 1794! By 
their own reasoning, therefore, the House Committee on Judi- 

* The two Dryden bills have been re-printed in full, with other matter 
pertaining thereto in Papers and Addresses, by John F. Dryden, Newark, 
N. J., 1910. 

209 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

ciary gave endorsement to the view that upon the facts as here 
disclosed, the business of insurance is within an exact and 
historical definition of commerce and as such within the scope 
of the commerce clause of the Constitution. 

Argument for Federal Supervision as a Constitutional 
Solution. 

The whole argument in favor of the power of Congress to 
legislate upon the subject of interstate insurance transactions 
(which constitute 82% of the whole business in the life branch 
alone) was summed up by Mr. Richard V. Lindabury, of New- 
ark, N. J. 

"Whether or not insurance is commerce is a question of 
fact, the answer to which depends upon the ascertainment not 
merely of the inherent characteristics of insurance, but also 
of the usages of the commercial world with respect thereto. 
The finding of a court, therefore, upon this question in a par- 
ticular case or class of cases does not bind the public or third 
persons or foreclose them from insisting to the contrary of such 
rinding in any future action where the question may arise. 

The question before the court in the insurance cases was 
not whether a State could regulate or prohibit interstate insur- 
ance, but whether it could do this with respect to insurance 
effected wholly within such State. 

The decisions of the Supreme Court in the interpretation 
of the Constitution are not to be regarded as possessing the 
same element of finality as are their decisions establishing 
rules of property. The latter cannot be departed from without 
danger of disturbing titles or contract rights which may have 
become vested thereunder. The former, however, may and 
should be disregarded whenever necessary to maintain the fun- 
damental law of the Constitution or to prevent the extension 
of an erroneous principle. 

The power of determining whether or not a particular 
business shall be regulated as interstate commerce, and for 
that purpose of determining whether or not it is capable of 
being so regulated, is committed by the Constitution to Con- 
gress, at least in the first instance, and it cannot be assumed 
that the Supreme Court, by any declaration or abjudication 
in advance of Congressional action, intended to prejudge the 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

question of the rightfulness of the exercise of this power inf a 
given case. 

It does not follow that because at one time insurance 
appeared to the Supreme Court to be a mere incident of com- 
merce, it must be forever and for all purposes so regarded. 
Nor does it follow that Congress, in determining the public policy 
of the nation, may not now declare that insurance shall hereafter 
be regarded and treated not as a mere incident o commerce, 
but as an integral part of commerce or as an important aid to 
or instrumentality thereof." 

Wilson and Hamilton on Insurance as an Element 
of Commerce. 
To this admirable summary there is nothing to add. It 
is a well-reasoned opinion, in strict conformity to the facts 
and in harmony with the view of James Wilson, himself a 
member of the Federal Constitutional Convention, who, speak- 
ing of the Law Merchant, said, "This system of law has been 
admitted to decide controversies concerning bills of exchange, 
policies of insurance, and other mercantile transactions, both 
when citizens of different states and citizens of the same state 
only have been interested in the event."* Equally pertinent 
and conclusive is the statement of Alexander Hamilton, who, 
in his official opinion to Washington upon the constitutionality 
of a U. S. Bank, enumerated among the powers of the govern- 
ment to regulate commerce with foreign nations, "the regula- 
tion of policies of insurance, the regulation of pilots, and the 
regulation of bills of exchange." f 

Advantages of Federal Supervision of Interstate 
Insurance Transactions. 

Upon identical facts and considerations rests the whole 
theory and persistent agitation of the advocates of Federal 
supervision of insurance. The foremost of these, ex-Senator 
John F. Dry den of New Jersey, in an address before the Newark 

♦Wilson's Works, Vol. I, p. 335. 

t Hamilton's Works, by H. C. Lodge, Vol. Ill, p. 203. 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

Board of Trade, on January 18, 1906, summed up the results 
of his own distinguished efforts in the statement that, 

"A Federal insurance law will not deprive the States of 
any rights specifically reserved to them under the tenth amend- 
ment. The States, under the bill introduced, will retain all the 
rights and powers over their own corporations which constitu- 
tionally belong to them, but the bill will put an end to the 
multiform system of State supervision and control over insur- 
ance corporations, which has no justification in any sound 
theory of constitutional rights or in any common-sense con- 
ception of State duty. The bill will put an end to interstate 
chaos and terminate an intolerable condition of affairs jeopar- 
dizing the interests and at times the very existence of companies 
transacting interstate business. The bill will establish insur- 
ance companies upon a national basis and give to the business 
a national character. The bill will bring insurance companies 
engaged in interstate business within the power and control of 
the Federal government and provide a system of supervision, 
examination and control, thorough, exacting and complete. 
The bill will increase the value of every form of insurance, 
materially enhance the security of the policyholders, and broaden 
the field of business operations to an extent impossible under 
the present system of supervision and control by some fifty 
different States and Territories. The States will continue to 
supervise insurance corporations of their own creation, but they 
will be deprived of power to supervise corporations of other 
States and to legislate regarding them, chiefly for the purpose 
of raising revenue or of harassing the companies by vexatious 
statutory requirements. It is not a theory, but a condition, 
which confronts the companies and their policyholders, who in 
their aggregate capacity represent the nation and not individual 
States. The policyholder is primarily and chiefly interested in 
the security and value of his contract, in the rate of premium 
which he pays, and in the safe and economical administration 
of the company with which he insures. It is not a question 
with him whether the company is located in the particular 
State in which he lives, or in any other State. As a life insur- 
ance policyholder living to-day in one State, he may tomorrow live 
in another, but his contract of insurance goes with him and 
protects and sustains him in the event of calamity or loss. It 
is not a theory that this business is national in extent and 
character, but an incontrovertible fact readily within the com- 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

prehension of any one who will carefully consider the vast 
extent of the business operations and the true character of 
insurance transactions. It is upon this ground that the advo- 
cates of Federal supervision rest their arguments and anticipate 
a favorable ruling from the Supreme Court in the event of the 
constitutionality of a law to this effect being brought to a test." 

Apparent Futility to Bring About Uniform Legislation. 
No answer has been made to this masterly summing up 
of the cause of Federal supervision of insurance. No answer 
can be made, save in the acceptance of the principles laid down 
and the conclusions warranted by the facts of history and 
every-day business experience. The day must come when the 
multitude of States will no longer have the power and unequiv- 
ocal privilege to impair, by more or less ill-advised legislation, 
an institution of such vast social and economic importance 
as insurance. For the time being, however, the outlook for 
Federal supervision of insurance is practically hopeless. The 
alternative lies in the direction of securing uniformity of law and 
legislation. Efforts in this direction have also practically been 
failures. At least six distinct attempts at uniform codifi- 
cation of the American law of insurance have been made, but 
no practical success has been attained. The evils of over- 
legislation are made evident by the statement that during the 
nine years ending with 1908 not less than 1,200 specific laws 
pertaining to the business of insurance were enacted by the 
different States. These laws have reference chiefly to statutory 
requirements, which it would be an utterly hopeless task to 
summarize, on account of their variety and contradictions. 
The state of the common law is also one of chaos, conflict and 
dissimilarity. As was said by ex-Senator Dryden, "What is per- 
mitted to be done in one State, is forbidden in another; and 
what is the law of one year, may not be the law of the next. 
The whole subject is enormously complicated by retaliatory laws, 
which have resulted in a condition properly described as inter- 
state warfare, unworthy of the civilization of the present day." 

213 



origin and growth of law and legislation 

Need of a Uniform Code on Insurance. 

Previous efforts in the direction of uniform legislation have 
been failures, but there is hope that expert codification for the 
District of Columbia may produce a model law, suitable for 
adoption by the different States. However, as said by ex- 
Senator Dry den, in his address on Uniform Law and Legislation 
on Life Insurance at the National Conference called by the 
National Civic Federation, in 1910, 

"The task, at best, will be an arduous one and it will be 
the better part of wisdom to make haste slowly. Widely con- 
flicting views and opinions will require to be harmonized and 
upon some matters irreconcilable differences of opinion will 
make a departure from standard requirements seem advisable. 
I am firmly convinced that a uniform code governing the essen- 
tials both of the public and the private law on the subject of 
insurance can be framed and the past experience of every life 
insurance company transacting business in the different States 
makes it desirable and proper that such a code should be pre- 
pared. Failing in this, the only ultimate alternative will be 
the supervision and control of the interstate business of Amer- 
ican insurance companies by the Federal government. Con- 
vinced today, as I have been for many years, that such super- 
vision is both constitutional and a rightful exercise of Federal 
power, I trust that the deliberations of the convention will do 
away with the possible necessity of Federal supervision by the 
enactment of rational and uniform insurance laws throughout 
the different States, Territories, and possessions of the United 
States." 

Conclusions. 

Law, like insurance, is a progressive science and legisla- 
tion on insurance in the long run attains the desired object of 
increasing the security of the contractual relations and of 
enhancing the economic and social value of insurance institu- 
tions to the advantage of the State. All proper insurance law 
has aimed towards betterment, but almost from the beginning 
of the recorded history of the business there is evidence that 
the insurance contract has been held to be one peculiarly en- 
titled to the interest of government. The principles of equity 
214 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

and public policy which underlie the earliest insurance ordinances 
and laws also underlie the law and legislation of today. The 
law laid down in the Chancery case of 1693, as to insurable 
interest, is the law today. The statutory enactments have given 
dignity and force to the legal status of insurance and the busi- 
ness is now the most completely supervised, controlled and 
regulated form of commercial enterprise in the world. The 
theory of insurance supervision and control is therefore not new, 
but as old as the business itself. The theory of State supervision 
did not, as often claimed, originate with the organization of 
the Massachusetts Department,' but it had its beginning in the 
Gambling Acts of 1754 and 1774 and the charter provisions 
of the first insurance company chartered by the State of Massa- 
chusetts in 1799 and the Act of that State passed in the year 
1808. The theory of State supervision of interstate business 
has developed out of circumstances and conditions beyond the 
control of the separate States. The theory of Federal super- 
vision of insurance is the logical solution of a vast amount of 
conflict in law and legislation, Federal and State. Insurance 
corporations, chartered by the State, tend more and more to 
become regulated and controlled even in matters of detail, 
standard policies, methods of valuation, limitation of expense 
and limitation of business, etc., until State responsibility has 
almost superseded full legal and moral responsibility on the 
part of the companies' administrative officers. Yet it remains 
true, more true to-day even than when it was written by Justice 
Holmes on the Common Law, that "The State might conceiv- 
ably make itself a mutual insurance company against accidents, 
and distribute the burden of its citizens' mishaps among all 
its members. There might be a pension for paralytics, and 
State aid for those who suffered in person or estate from tem- 
pest or wild beasts. As between individuals it might adopt 
the mutual insurance principle pro tanto, and divide damages 
when both were in fault, as in the rusticum judicium of the 
admiralty, or it might throw all loss upon the actor irrespective 
of fault. The State does none of these things, however, and 

215 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

the prevailing view is that its cumbrous and expensive ma- 
chinery ought not to be set in motion unless some clear benefit 
is to be derived from disturbing the status quo. State inter- 
ference is an evil, where it cannot be shown to be a good. Uni- 
versal insurance, if desired, can be better and more cheaply- 
accomplished by private enterprise. " 

The following suggestive words of Herbert Spencer may 
also aptly be quoted in this connection : " Which is the 
more misleading, belief without evidence, or refusal to believe 
in presence of overwhelming evidence ? If there is an irrational 
faith which persists without any facts to support it, there is an 
irrational lack of faith which persists spite of the accumula- 
tion of facts which should produce it; and we may doubt 
whether the last does not lead to worse results than the first."* 
The whole history of insurance law and legislation sus- 
tains the belief and conviction that government supervision, 
regulation and control of corporations engaged in interstate 
business is a Federal and not a State function and it would 
be going contrary to the facts of history and the growth of 
human intelligence and the whole theory which underlies a 
representative form of government, that the highest enduring 
considerations of public policy should be made subservient to 
an abuse of the doctrine of stare decis, or even worse, to un- 
worthy considerations of political expediency. 

LIST OF REFERENCES. 

1810 Abbott, Chas. ; Treatise on the Law of Merchant Ships and Sea 
Men; and American from the 3rd London Edition, Newburyport, 
1 810. (Insurance, p. 90.) 

1855 Abstract of the Return and Statement of Foreign Insurance Com- 
panies for the year ending December 31, 1854; prepared from 
official returns by Ephraim M. Wright, Sec'y of the Common- 
wealth. Boston, 1855. 

1836 Act of Incorporation and By-Laws of the Herkimer County Mutual 
Insurance Company, dated April 29, 1836. Albany, N. Y., 1851. 



* Ethics of Social Life, Part IV, Par. 133. 
216 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

1 85 1 Act of 1 85 1 relating to the Life Insurance Companies transacting 
business in the State of New York with observations on ill- 
advised legislation, in the section on Commercial Regulations 
of Hunt's Merchant's Magazine, 1851, p. 755. 

1 85 1 Address, etc., on the American Temperance Life Insurance Com- 
pany, organized July, 1851, Hartford, Conn., containing state- 
ment by Comptroller of Public Accounts, dated Hartford, 
August 27, 1 85 1, that "The strength, ability and well invested 
capital of this institution, are surpassed by no other Life Insur- 
ance Company, which entitles it in my opinion, to the fullest 
confidence of the public." 

1850 Address, etc., on the Merchant's and Mechanics' Mutual Life 
Insurance Company, New York, including copy of charter 
granted May 17, 1850. 

1854 Address, etc., on the Susquehanna Mutual Life Insurance Com- 
pany of Harrisburg, Pa., Chartered March 23, 1854. 

1788 A General Treatise of Naval Trade and Commerce, as founded 
on the Laws and Statutes of this Realm, 2 Vols., London, 1788. 
(Vol. I, Chap. VII, treats of the Insurance of Ships; Chap- 
VIII of Marine Contracts and Bottomry. List of Statutes 
since 1601 given in Vol. I, p. 81, et seq.) 

1841 A Historical View of the Law of Maritime Commerce, by James 
Reddie. London. 

1 810 A Letter to Jasper Vaux, Chairman of the Meeting at Lloyd's, 
etc., in which the nature and principles, and the past and 
present extent of Marine Assurance are examined; and the 
necessity of a new company to effect Marine Assurance pointed 
out; and the opposition displayed to its establishment, espe- 
cially by the Underwriters at Lloyd's Coffee-House, is con- 
sidered and refuted. By a subscriber to Lloyd's. London, 
1810. 

1847 Allgemeiner Plan Hamburgischer Seeversicherungen von dem 
Jahre, 1847. Hamburg. 

1867 Allgemeine Seeversicherungs Bedingungen von der Handels- 
kammer in Hamburg. 1867. 

1 90 1 Ames, James Ban*; Selection of Cases on the Law of Admiralty 
Cambridge, 1901. (For case of Insurance Company vs. Dun- 
ham, see p. 39, et seq.) 

1836 An Act to Incorporate a Fire Insurance Company in the City of 
Baltimore, etc. Baltimore, 1836. (For affording additional 
security to commercial transactions.) 

217 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

1830 An Act to Incorporate the New York Life Insurance and Trust 
Company. (Sec. 18 of this Charter required reports to be made 
annually to the Chancellor, empowered to make a thorough 
investigation into the affairs of the company, etc.) 

1 81 4 An Address from the President and Directors of the Pennsyl- 
vania Company for Insurance on Lives and Granting Annuities 
to the Inhabitants of the United States. Phila., 181 4. 

1884 Annals of Lloyd's Register, 1 834-1 884. London, 1884. 

1808 Annesley, Alexander; Compendium on the Law of Marine Insur- 
ances, Bottomry, Insurance on Lives, etc., Middletown, Conn., 
1808; (probably the first American treatise on the law of insur- 
ance). Speaks of marine insurance as "that important branch 
of commercial enterprise." 

1826 Argument in support of the Memorial of the Marine Insurance 
Company of Baltimore to the Congress of the United States, 
praying compensation for losses sustained under the Treaty 
with Spain of the 22nd of February, 1819, by Robt. Taylor. 
Norfolk, 1826. 

1909 Ashburner, Wm.; The Rhodian Sea-Law, from original manu- 
scripts. Oxford, 1909. 

1806 Azuni, D. A.; The Maritime Law of Europe, 2 Vols.; translated 
from the French. New York, 1806. 

1856 Baily, Laurence; General Average and the Losses and Expenses 
resulting from General Average Acts; 2nd Ed., London, 1856; 
(with special reference to the doctrine or principle of "com- 
mon interest"), p. 7. 

1898 Baldwin, Simeon, Modern Political Institutions, Chap. VI, on 
Freedom of Incorporation. Boston. 

1882 Barber. Wm.; Principles of Law of Insurance, as adopted in the 
Civil Code of California; San Francisco, 1882. 

1752 Beawes, Wyndham; Lex Mercatoria Rediviva, or the Merchant's 
Directory, London, 1752. (Article on Insurance, pp. 261-307.) 

1905 Beck, James M.; Federal Supervision of Insurance, reprint of 
address. New York, 1905. 

1846 Beckmann, John; History of Inventions, Discoveries and Origins; 
translated from the German by Wm. Johnston, 4th Ed., Vol. 
I, p. 234. London, 1846. 

1850 Benedict, Erastus C; American Admiralty. New York, 1850. 

1 891 Beneke, Max; Der Ristorno in der Seeversicherung. Berlin, 
1 891. 

1852. Binney, Horace; Centennial Meeting, Address on the Philadel- 
phia Contributionship for the Insurance of Houses from Loss 
by Fire. Phila., 1852. 

218 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

1810 Binney, Horace; Reports of Cases adjudged in the Supreme 
Court of the State of Pennsylvania. Phila., 1810, Vol. II. 

1765 Blackstone; Commentaries on the Laws of England; Book II, 
Chap. 30. 

1832 Blunt, Joseph; Merchant's and Shipmaster's Assistant, New 
York, 1832. (Chap. VII treats of Insurance, Average, etc.) 

1905 Breckenridge, Ralph W. ; Report of Committee on Insurance 

Law of the American Bar Association (in favor of Federal 
regulation of insurance). Report of 28th Annual Meeting of 
the American Bar Association. Phila., 1905. 

1826 Buck and Hedrick vs. The Chesapeake Insurance Company, 
Baltimore, 1826. 

1854 Bunyon, Chas. J.; Law of Life Assurance. London, 1854. 

1801 Burn, John I.; Practical Treatise or Compendium of the Law of 

Marine Insurances. London, 1801. 
1830 Burney, Wm., Universal Dictionary on the Marine. London. 1830. 

1802 Caines, George; "An Enquiry into the Law Merchant of the 

United States; or, Lex Mercatoria Americana." Vol. I (all 
printed). New York, 1802. 
1907 Calvert, Thos. H. ; Regulation of Commerce under the Federal 
Constitution. Northport, L. I., 1907. (Insurance, p. 245, et seq.) 

1907 Carter, James C. ; Law; its Origin, Growth and Function, New 

York, 1907. 

1906 Centralization and the Law, with an introduction by Melville M. 

Bigelow. Boston. P. 191. 

1844 Charter and By-Laws of the State Mutual Life Insurance Com- 
pany of Worcester, Mass., incorporated March 16, 1844. Wor- 
cester, Mass., 1845. 

1876 Clarke, Julius L. ; Historical Sketch of Insurance Legislation in 
Massachusetts; Appendix to 21st Annual Report of Insurance 
Commissioner of Massachusetts. Boston, 1876. 

1 81 9 Constitution and By-Laws of the Female Friendly Institution of 
the City and Liberties of Philadelphia. Phila., 181 9. (Pro- 
vided for the payment of $20 at death.) 

1908 Cooke, Frederick H.; Commerce Clause of the Federal Constitu- 

tion. New York, 1908. (Insurance, p. 15.) 
1905 Cooley, Roger W. ; Briefs on the Law of Insurance in 5 Vols. 

St. Paul, Minn., 1905. 
1893 Coxe, Brinton; An Essay on Judicial Power and Unconstitutional 

Legislation. Phila., 1893. 
1 810 Cursory observations upon the proposed application to the Legis- 
lature of these Kingdoms for the Grant of a Charter to effect 
Marine Insurances. London, 1810. 

219 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

187a Daly, C. P.; Opinion on Barratry; its Origin, History and Mean- 
ing. New York, 1872. 

1905 Davis, John P.; Corporations; a Study of their Origin, etc., 2 

Vols., New York, 1905. 
1859 Dixon, Francis B.; Abridgment of the Maritime Law, Norfolk, 
1859. 

1906 Dryden, John F. ; Commercial Aspects of Federal Regulation of 

Insurance. (Re-published in Papers and Addresses, 19 10.) 
1 910 Dryden, John F. ; Uniform Law and Legislation on Life Insur- 
ance; address before National Civic Federation Conference on 
Uniform Legislation. Washington, 1910. 
n. d. Dubost, Christopher; Elements of Commerce. 2 Vols., London. 

1907 Duckworth, Lawrence; An Encyclopedia of Marine Law. Lon- 

don, 1907. 

1845 Duer, John; Law and Practice of Marine Insurance, 2 Vols. New 
York, 1845. 

1832 Ellis, Chas.; Law of Fire and Life Insurance. London, 1832. 

1844 Erichsen, E. M. W. ; Enthullungen von Havarie-Umtrieben, 
Altona, 1844. 

1797 'Espinasse, Issac; Reports of Cases Argued and Ruled at Nisi 
Prius, 1 793-1 796. Dublin, 1797. 

1853 Europaeischen Seerechtes, Havarie, Assecuranz und Bodmerei. 
Hamburg, 1853. 

1 82 1 Explanatory Remarks and Observations on the subject of fire 
Insurance, having reference to Policies of the Merchants Insur- 
ance Company in Boston. Boston, 1821. 

1855 First Massachusetts Insurance Report. Boston, 1856. 

1852 Flanders, Henry; Treatise on Maritime Law. Boston, 1852. 

1888 Fowler, J. A.; History of Insurance in Philadelphia for Two 
Centuries, 1688-1882. Phila., 1888. 

1840 Fraud upon Underwriters; Article in Hunt's Merchant's Maga- 
zine, 1840, p. 288. 

1866 Fundamental By-Laws and Tables of Rates, etc., printed by the 
Corporation for the Relief of Widows and Children of Clergy- 
men, in the Communion of the Protestant Episcopal Church, 
etc. Phila., 1866. 

1772 Gordon, Wm.; The Plan of a Society for Making Provision for 
Widows, by Annuities for the remainder of Life, etc. Bos- 
ton, 1772. 

(Probably the rarest document on insurance in America.) 

1909 Gow, Wm.; A Handbook of Marine Insurance, Revised Edition. 
London, 1909. 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

1885 Graham, J. C. ; Treatise on the Contract of Sale. (Article on 

Insurance, p. 132.) 
181 1 Hall, John E. ; An Essay on Maritime Loans, from the French of 

B. M. Emerigon, with notes, etc. Baltimore, 181 1. 

1809 Hall, John E. Practice and Jurisdiction of the Court of Admir- 

alty. Baltimore, 1809. 

1840 Hammond, Elisha, Counsellor-at-Law; Law of Fire Insurance 
and Insurance on Inland Waters. New York, 1840. 

1901 Hardy, E. R.; Early Insurance Offices in Massachusetts (1724- 
1801), Boston Insurance Library Association. Boston, 1901. 

1849 Hartford Life and Health Insurance Company; address on life 
insurance, its Advantages, etc., with Rates, Rules, Regula- 
tions, etc. Hartford, 1849. 

1906 Hearing before the House Committee on the Judiciary in relation 
to Federal Supervision of Insurance. Washington, D. C, 
1906. 

1906 Hendrick, Frank; The Power to Regulate Corporations and Com- 
merce; New York, 1906. (Insurance, p. 106.) 

1 810 Historical reference to American Fire Insurance Company of 

Philadelphia, chartered by the Legislature of Pennsylvania, 
Feb. 28, 1 810, with reference to Pennsylvania Law of 1810, 
prohibiting all insurance by foreign corporations not citizens of 
the United States. Spectator, New York, April 7, 1910. 

1840 History and Law of Fire Insurance; Hunt's Merchant's Maga- 
zine, 1840, p. 239. 

1881 Holmes, O. W., Jr.; Common Law. Boston. 

1889 Hooper vs. California; Record of Case No. 13, 586; statement as 
to facts, p. 37; opinions of the Court, p. 37. (Filed, 1889.) 

1859 Hopkins, Manley; Handbook of Average, 2nd Ed. London, 
1859. 

1 90 1 Hughes, Robt. M. ; Handbook of Admiralty Law, St. Paul, 1901. 
(Chapter III treats of General Average and Marine Insur- 
ance and Chapter IV of Bottomry and Respondentia Bonds.) 

1843 Hunt's Merchant's Magazine, 1843, P- l6 9 (abstract of an opinion 
in the case of a whaling voyage from Nantucket). 

1834 In Chancery before the Chancellor in the Matter of the New 
York Life Insurance and Trust Company, Answer and Report, 
March, 1834. 

1907- Index to Economic Material in the Documents of the States of 
08 the United States; prepared by the Dept. of Economic Sociol- 
ogy of the Carnegie Institute. New York, 1907. Mass., 1908; 
New Hampshire, 1907. 

221 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

1906 Insurance Convention (Chicago); Message from the President of 
the United States, with report and recommendations, 59th 
Congress, 1st Session; Senate Document 333, Washington, 
D. C, April 17th, 1906. 

1910 Insurance Enactments of 1909, Law Reporting Co. New York. 

1744 Jacob, Giles; New Law Dictionary (article on insurance). Lon- 
don, 1744. 

1904 Jones, Paul; Commercial Power of Congress. New York, 1904. 

1826 Kent, James; Commentaries on American Law, 1st Ed., 1827; 
12th Ed. edited by Oliver Wendell Holmes, Jr., and 14th Ed. 
edited by John M. Gould. Boston, 1896. (Insurance, Vol. 
Ill, p. 253 et seq.) 

1909 Kingsley, Darwin P.; Insurance Supervision and National Ideals 

North American Review, April, 1909. 
1798 Klefeker, F. M.; Von der Havareigrossa, etc., der Reichstadt 

Hamburg. GOttingen, 1798. 
1 81 8 Laws of the Sea; with reference to Maritime Commerce during 

Peace and War; from the German of Friedrick J. Jacobsen, by 

Wm. Frick, Counsellor-at-Law. Baltimore, 181 8. 
1890 Lectures on Constitutional History and Course of Development 

of American Law; by Cooley, Hitchcock, etc. New York, 

1890. 
1853 Lectures on Life Insurance; by Moses L. Knapp, M. D. Phila., 

1910 Legal Status of Seamen, including references to Ancient Sea 

Laws. Doc. 552, 61st Congress, 2nd Session, May 19. 

1 81 4 Letter from the Secretary of the Treasury transmitting a state- 
ment containing the information in relation to the incorporated 
Banks and Insurance Companies within the District of Colum- 
bia, required by a resolution of the 10th inst., Feb. 22nd, 181 4. 
Washington, D. C, 1814. 

(First official report on insurance in the United States, in- 
cluding reference to Marine Insurance Co. of Alexandria, incor- 
porated by the Legislature of Virginia on Jan. 16, 1798.) 

1906 Lindabury, Richard V.; Argument on Federal Supervision of 
Insurance, prepared for Senate Committee on Judiciary. 

1894 List of Cases in which Statutes of the United States have been 
held unconstitutional by the Supreme Court of the United 
States, 1 792-1887 (20 cases in all). Proceedings New Hamp- 
shire Bar Association, 1894. 

1906 List of Works relating to Government Regulation of Insurance, 
Library of Congress. Washington, D. C, 1906. 

1909-10 Lloyd's Calendar. London. 

222 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

1799 Manhattan Insurance Company of New York, chartered in 1799; 
commenced life insurance business in 1800; full account of, in 
Weekly Underwriter, New York, Sept. 9, 1905. (Also Colum- 
bian Centennial of Boston, May 28th, 1800.) 

1909 Manes, Alfred, Insurance Cyclopaedia (in German), 2 vols. Tubin- 
gen, 1909. 

1909 Marine Insurance Gambling Act (9th Edw. 7, Ch. 12). 

1909 Marine Insurance n Export Trade; United States Consular Re- 
port, Oct. 25th, 1909. 

1 810 Marryat, Joseph; Speeches on Abuses in Marine Insurance, and 
Edition. London, 1810. 

1810 Marshall, Samuel; Treatise on the Law of Insurance, 2nd Amer- 

ican Edition, including cases decided in the National and 
State Courts, by J. W. Condy. Phila., 1810. 

(Considered the best edition of Marshall's works.) 

1808 Marshall Samuel; Treatise on the Law of Insurance, 2 Vols., 2nd 
Edition. London, 1808. 

1876 Martin, Frederick; History of Lloyd's and Marine Insurance in 
Great Britain. London, 1876. 

1857. Martineau, Harriet; Corporate Tradition and Natural Rights, 
Local Dues on Shipping, etc. 1857. 

1787 Millar, John ; Elements of the Law of Insurances. Edinburgh, 1787. 

1909 Moldenhauer, Paul; Article Seeversicherungs in Versicherungs 
Lexicon, by Alfred Manes. Tubingen, 1909. 

1769 Molloy, Chas. ; "De Jure Maritimo et Navali;" or, a Treatise of 
Affairs Maritime and of Commerce; 2 Vols., 9th Edition. Lon- 
don, 1769. (Article Assurance, Book 2, Chap. 7; article Bot- 
tomry, Book 2, Chap. 2.) 

1885 Montgomery, Thos. H.; History of the Insurance Company of 
North America. Phila., 1885. 

181 1 Montifiore, J.; The American Trader's Compendium. Phila., 181 1. 
1892 Morrell, C. F. ; Insurance; a Manual of Practical Law. London, 

1892. 
1908 Mutual Life Ins. Co. vs. State of Ohio, Supreme Court of Ohio. 

No. 11,379; Brief for Plaintiff in Error. 

No. 11,379; Brief for Defendant in Error. 

No. 11,379; Brief for Plaintiff in Error in Reply. 
1905 Nash, Frederick H.; Federal Supervision of Insurance; Proceed- 
ings of Insurance Commissioners' Convention, 1905 
1899 New York Life vs. Craven; Statement, Assignments of Error and 

Brief for Plaintiff in Error, October Term, U. S S. C, 1899; 

Brief for Defendant in Error, October Term, N. Y. S. C, 

1899. 

223 



ORIGIN AND GROWTH OP LAW AND LEGISLATION 

1899 New York Life vs. Craven; Transcript of Record; Filed, April 

14, 1899. 
1852 Norton, Chas. B.; Handbook of Life Insurance. New York, 185a. 
1833 Opinion of the Supreme Judicial Court of Massachusetts in the 

case of Wm. Eager vs. The Atlas Ins. Co., with remarks thereon, 

By an Underwriter. Boston, 1833. 

181 7 Park, James Allan; System of Marine Insurances, etc. Seventh 

Edition, 2 Vols. London, 181 7. 
1790 Park, James Allan; System of the Law of Marine Insurances, 

Second Edition.. London, 1790. 
1857 Parliamentary Report on Fire Insurance Duties. London, 1857. 
1859 Parsons, Theophilus; Treatise on Maritime Law, 2 Vols. Boston, 

1859. (Insurance, p. 6, et seq.) 
1869 Paul vs. Virginia, Transcript of Brief of Thos. B. Bowden for 

Defendant in Error, filed U. S. S. C, October 1869. (Mss. on 

file in Library of Prudential Ins. Co. of America.) 
1868 Paul vs. Virginia; Transcript of Brief for Plaintiff in Error; Dec. 

Term U. S. S. C. (Mss. on file in Library of Prudential Ins. 

Co. of America.) 

1901 Peelle, S. C, and Deis, J. H.; General Principles of the Law of 

Insurance. Washington, 1901. 
1908 Peeps into the Past; Account of the old Amicable and Norwich 

Union Life Office, 1 706-1908 Norwich, England, 1908. 
1823 Phillips, Willard; Treatise on the Law of Insurance, 1st Ed., 

Boston. 

1902 Plass, F. ; Geschichte der Assecuranz und der hanseatischen 

Versicherungs Borsen. Hamburg, 1902. 

1904 Pollock, Sir Frederick; Expansion of the Common Law. Boston, 
1904. 

1 75 1 Postlethwayt, Malachy; Universal Dictionary of Trade and Com- 
merce, 2 Vols., London, 1751. (Assurance or Insurance, Vol. 

I, PP- I35-I3 1 -) 

1898 Prentice and Egan; Commerce Clause of the Federal Constitu- 
tion. Chicago, 1898. (Insurance, p. 46.) 

1832 Proposals and Rates of the Baltimore Life Insurance Company, 
Incorporated December Session, 1830. Baltimore, 1832. 

1 81 8 Proposals of the Massachusetts Hospital Life Insurance Com- 

pany, including Act of Incorporation of 181 8 and Amendments 
of 1823-1824; also By-Laws, Rules and Regulations. Boston, 
1830. 
1 81 2 Proposals of the Pennsylvania Company for Insurances on Lives 
and Granting Annuities; incorporated March 10, 181 2, with a 
perpetual charter. Phila., 1837. 

224 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

1818 Prospectus of the Union Insurance Company, incorporated by 
the Legislature of the State of New York for making Insur- 
ance on Lives and granting Annuities (with extract from the 
charter). New York, 1818. 

1905 Randolph, Carman F. ; Federal Supervision of Insurance; Colum- 

bian Law Review, Vol. 5, November, 1905, pp. 500-528. New 

York, 1905. 
1891 Rehme, Paul; Die Haftung des Reeders im Mittelalter; Inaug. 

Diss., Stuttgart, 1891. 
1893 Relton, Francis B.; An account of the Fire Insurance Companies, 

Associations, Institutions and Schemes, etc., in Great Britain 

and Ireland, during the 17th and 18th Centuries, including the 

Sun Fire Office, etc. London, 1893. 
1856 Remarks on the Proposed Scheme for an Insurance Dep't at Albany, 

N. Y. (No signature, no place of publication, or name of printer.) 
1 81 1 Remarks relative to the Danger Attendant on Convoys together 

with a proposition to promote commerce, etc. London, 181 1. 
1855 Report of Cases decided by the Supreme Court of the State of 

New York, in re John S. Mitchell vs. New York Union Ins. 

Co. New York, 1855. (Contains copy of conditions of policy 

of insurance made in November, 1852.) 
1836 Report of the Committee on Mercantile Affairs and Insurance, 

relative to Insurance Companies. Boston, Feb. 24, 1836. 

1906 Report of the House Committee on the Judiciary in relation to 

the Regulation of Corporations — 59th Congress, 1st Session, 
Report 2491. 

1907 Report of I. L. Pendleton, Chairman of the Joint Ins. Investi- 

gating Committee of the 55th Gen'l Assembly of the State of 

Tenn. Nashville, 1907. 
1907 Report of the Legislative Ins. Committee for Iowa. Des Moines, 

1907. 
1909 Report of Lloyds and Inter-Insurance as Conducted in New York. 

N. Y. Ins. Dept., Albany. 

1906 Report of New Jersey Senate Committee on Life Insurance 

Investigation, 4 vols. Paterson, N. J., 1906. 
1873-74 Report of Royal Commission on Unsea worthy Ships, Parlia- 
mentary Papers C853, C853I, C-1027. 

1907 Report of the Joint Special Committee on Ins., appointed to 

Revise and Amend the Ins. Laws of the Commonwealth of Mass. 
House Doc. 1088. Boston, Mass. 
1 83 1 Report of the Trustees of the New York Life Insurance and 
Trust Company, made to the Chancellor of the State of New 
York. Albany, 1831. 

225 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

1853 Report on Assurance Associations, Parliamentary Paper. Lon- 
don, 1853. 

1906 Report of Wisconsin Ins. Investigation Committee. Madison, 1906. 

1900-09 Reports oi the Commissioners on Uniform State Legislation. 
ioth-i9th. Pub. by the American Bar Association, 1900-09, 

1871-1909 Reports of the Proceedings of the National Convention of 
Insurance Commissioners, 1st to 40th, 1 871-1909. 

1909 Richards, George; A Treatise on the Law of Insurance; 3rd Ed. 
New York, 1909. 

1905 Rogers, James S.; Article on Power of Congress over Interstate 
and Foreign Commerce; American Law Register, 1905. 

1905 Roosevelt, T.; Message to the 59th Congress, 1st Session, 
Washington, 1905. (Insurance mentioned on p. 16.) 

1 85 1 Rules and Regulations and Warranties of the Montrose Insurance 
Association deemed a part of the Policies of Insurance on 
Vessels insured by them, belonging to the Ports of Montrose, 
Arbroath, etc. 

1858 Second Annual Report of the Massachusetts Insurance Com- 
mission on Loan Funds Associations. Boston, 1858. 

1894 Seeliger, Arthur; Inaugural Dissertation Der "Erfolg" als Voraus- 
setzung dergrossen, Havarei, Berlin, 1894. (Contains extensive 
historical inquiry into the theory and practice of contribution- 
ship and average.) 

1908 Senate Proceedings on Governor's Recommendation upon Fleming 
Report for Removal from Office of Supt. of Ins. Otto Kelsey. 
Albany, N. Y., 1908. 

1 90 1 Short Historical Sketch of the Atlantic Mutual Insurance Com- 
pany, 1 842-1 90 1. New York, 1901. 

1769 Some Account of the Charitable Corporation lately erected for 
the Relief of Widows and Children of Clergymen in the Com- 
munion of the Church of England in America, by Wm. Smith, 
D. D. Phila., 1769. 

1833 Stevens and Beneke; Treatise on Average and Adjustment of 
Losses in Marine Insurance, with notes by Willard Phillips. 
Boston, 1833. 

1905-6 Testimony taken by the Legislative Insurance Investigation 
Committee and Report, 10 vols. Albany, 1905-6. 

1842 The Law of Shipping and Insurance, by a Member of the Faculty. 
Edinburgh, 1842. 

1897 The law relating to unconscionable bargains with money lenders; 
including the History of Usury to the Repeal of the Usury 
Laws; by Hugh H. L. Bellot and R. J. Willis. London, 
1897. 

226 



ORIGIN AND GROWTH OF LAW AND LEGISLATION 

1902 The Lottery Cases, Revised Brief for the United States; by James 
M. Beck, Ass't Attorney-General, October Term, 1902. 

1855 The Objects, Principles and Regulations of the New England 
Mutual Life Ins. Co. of Boston, including Act of Incorpora- 
tion of 1835, providing for capital stock and gradual redemp- 
tion of annual subscriptions out of profits, etc. Boston, 
1855. 

1834 The Pernicious Effects of Sea Insurance. London, 1834. 

1825 Tonnies, P D. W. ; Chronik des Hamburger See-Assecuranz- 
Geschafts im Jahr 1824. Hamburg, 1825. 

1823 Tonnies, P. D. W. ; Uber Avarie-Grosse. Hamburg, 1823. 

1850 Tuckett, Harvey G. ; Practical Remarks on the Present State of 
Life Insurance in the United States. Phila., 1850. 

1904 Vance, William Reynolds; Handbook of the Law of Insurance. 
St. Paul, Minn., 1904. 

1859 Vetoes of the Council of Revision of the State of New York, by 
Alfred B. Street, Albany, 1859. (Ins. p. 345.) 

1901 Wambaugh, Eugene, LL. D.; Selection of Cases on Insurance. 
Cambridge, 1901. 

1888 Wendt, Ernest Emil; Papers on Maritime Legislation, with a 
translation of the German Mercantile Laws relating to Mari- 
time Commerce. London, 1888. 

1 781 Weskett, John; Complete Digest of the Theory, Laws and Prac- 
tice of Insurance. London, 1781. 

1890 Willoughby, Westel W.; The Supreme Court of the United States. 
Baltimore, 1890. 

1897 Williams, Gomer; History of the Liverpool Privateers (with 
reference to Insurance). London, 1897. 

19 1 1 Wucherverbots, Einfluss des kanonischen, auf die Entwicklung 
der Assekuranz; by Blumhardt, Berlin, Journal of the German 
Society for Insurance Science, Jan., 1911. 



227 



CHAPTER V. 

LIFE INSURANCE SUPERVISION AND GOVERNMENT 
CONTROL IN GERMANY* 

The adequate and effective supervision and regulation by 
Government of insurance corporations is one of the most im- 
portant and complex problems in political science. The mag- 
nitude of the business, and its intimate relation to public wel- 
fare, precludes the idea of a let-alone policy of government 
on the one hand, or of a too restrictive policy of legislative 
interference and control on the other. The latter is practically 
certain in the long run to do a vast amount of permanent harm. 
The conflict of opinion lies between these two extremes, and 
as an admirable compromise the insurance legislation of Switz- 
erland, Austria and Germany is deserving of serious and critical 
consideration. 

Insurance Legislation in Continental Europe. 

The insurance laws of Switzerland were adopted by the 
Federal Council in 1885 and they have remained practically 
unchanged during the intervening twenty-two years. The 
Austrian regulations were adopted in 1896, and the German 
code in 1901. These codes and regulations govern the business of 
insurance in broad outlines upon the basic principles of equity and 

* Address delivered at the Annual Convention of Insurance Commis- 
sioners held in Richmond, Va., in 1906. It has not seemed necessary 
to bring the statistical data down to date since the practice of the Depart- 
ment has undergone no material change in the meantime. For much 
of the information contained in this address I am under personal obliga- 
tions to the President of the Department, Herr Gruner, who, on several 
occasions kindly extended to me the courtesies of his office, to facilitate 
my inquiry into a rather difficult branch of German administrative law. 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

public policy. They confer great powers of discretion upon the 
supervising authorities, while providing for the necessary tech- 
nical and practical qualifications in the supervising officials. 
The codes contain few regulations in matters of administrative 
detail, which is probably the chief reason why in practice they 
have been so generally satisfactory and effective. 

The German Insurance Code op 1901. 

It was originally my intention to discuss in outline the in- 
surance legislation of the three countries named, but after 
further consideration I concluded that it would serve a more 
practical purpose to limit my observations to the insurance 
code of Germany. While the code has been translated into 
English in the consular report upon "Insurance in Foreign 
Countries," (1905), the translation is crude, and in matters 
of detail decidedly unsatisfactory. On account of material 
differences in institutions and methods of government, it is 
a somewhat difficult undertaking to present the essential facts 
of German insurance legislation with such brevity as would 
be desirable. The general literature of the subject is very 
extensive and upon the code itself about a dozen commentaries 
had appeared within less than two years after the law went 
into effect. The official literature is also very considerable, 
including, among others, five annual reports upon the business 
operations of the Department, supplemented by three statis- 
tical reports and some twenty -three elaborate periodical publi- 
cations issued at intervals of about three months, and many 
special publications of the Department. Of this wealth of 
information and experience I have, of necessity, had to make 
an arbitrary selection of such matters as seemed to me to be 
of most practical value as a slight contribution to the high 
aims and purposes of this convention. 

Imperial Supervision and Control of Interstate Insurance. 

The German insurance code applies to the whole of Germany, 
but not to the German possessions in foreign countries. The 
229 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

law applies specifically only to private insurance undertakings 
which do business in more than one German state, or in a Ger- 
man state and a foreign country. The separate states, however, 
may arrange with the Imperial Supervising Department, estab- 
lished by the code for the supervision of local undertakings, 
and some of the smaller states have already done so, while others 
are expected to follow. State insurance undertakings in any 
form are not subject to the code, but remain subject to local 
laws and regulations. The compulsory system of government 
insurance is also outside of the operations of the code, being 
governed separately by the Imperial Insurance Department, 
which must not be confused with the Imperial Supervising 
Department of Private Insurance Undertakings. 

Insurance Companies Considered Commercial 
Undertakings. 

The code is the logical result of more than forty years 
of public agitation for certainty and uniformity in insurance 
legislation. In its general outlines the code conforms to the 
commercial law, and many provisions are by specific reference 
adopted from the commercial code. The code considers insurance 
companies from practically the same legal and administrative 
points of view as corporations generally and while previous 
to its adoption mutual companies and associations did not 
possess the rights and privileges of corporations, this defect 
in the law was corrected by the code of 1901. The code does not 
apply to marine and inland insurance, or to re-insurance com- 
panies, upon the theory that these undertakings are so strictly 
commercial in character and purpose that the commercial 
world is fully competent to protect itself against possible mis- 
takes. Registered Friendly Societies and Miners' Benefit Funds 
are also outside of the scope of the code. The code is almost 
free from technicalities and is readily within the understanding 
of anyone with a fair degree of intelligence. 
230 



supervision and government control in germany 

Code Limited to the Administrative Law of Insurance. 

The code is limited to the administrative, or public, 
law of insurance. For the time being the private, or contract, 
law of insurance remains subject to the various conflicting 
regulations of the different states, but a code has been framed 
after extended and expert consideration, which would have 
passed the Imperial Parliament at its last session [1906] but 
for its unexpected dissolution.* Similar codifications of the 
private law of insurance are under consideration in Austria 
and Switzerland. The distinction between the administrative, 
or public, law of insurance, and the private, or contract, 
law is vital, and there is practically never any confusion upon 
these two branches of legal science in the legislation of Euro- 
pean countries. The Germans have a strong inclination for 
technical excellence in the codification of their laws, and the 
insurance code represents many years of careful inquiry and 
consideration, with a due and impartial regard to all of the 
interests affected by legislation of this character. 

Insurance an Element of German Constitutional Law. 

The code, on the whole, has worked well in practice, to the 
satisfaction alike of the Government, the insurance companies, 
and the general public. There have been no changes or amend- 
ments to the law during the five and a half years since the same 
went into effect. Every provision of the code was framed upon 
the best obtainable expert and impartial advice. Its legislative 
history is a credit to the German people, who, with character- 
istic patience and thoroughness, deliberated long but wisely 
before making a fundamental law to henceforth govern so vast 
and important a social institution as insurance. The code also 

* The code governing the contract of insurance was enacted in 1908, 
and in its entirety the same went into effect on Jan. 1, 19 10. The 
code, as finally adopted, was the fifth proposal, the first having been 
prepared by the Imperial Dep't of Justice in 1903, and changed and 
amended proposals having been introduced into the Federal Council in 
1905 and in the Imperial Parliament in 1907 and 1908. 

231 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

reflects creditably the advancement of German insurance science 
in its legal, administrative, and technical departments. The 
code is strictly constitutional legislation, since by Article 4 
of the German constitution insurance is included as one of the 
interests subject to imperial law, following in this respect the 
constitution of the North German Confederacy of 1866. 

Public Interest in Insurance Legislation. 

I need only very briefly sketch the legislative history of the 
code, which, however, is decidedly instructive as illustrating 
the method pursued to combine a high degree of technical 
perfection in matters of detail with efficiency in administration. 
After many years of public discussion, the first draft of 
the code was made public on the 26th of November, 1898, 
and immediately attracted universal and critical attention. 
The code as proposed conformed in its outlines to the law 
as subsequently adopted, but many important changes were 
found necessary and made in due consideration and after ex- 
tended hearings of the interests affected. Naturally, there 
was at first considerable opposition to some of the more restric- 
tive provisions of the code, but an expression of expert opinion 
was solicited from all in a position to make practical sugges- 
tions or give useful advice. How universal the interest in 
the question was, and how strictly commercial the point of 
view, is best illustrated by the fact that in addition to the 
national societies of German life and fire insurance companies, 
the various chambers of commerce throughout the Empire sub- 
mitted briefs and arguments. Among others the subject was 
considered in detail at various commercial congresses and by 
the Association of German Agricultural Interests, followed by 
resolutions of the German Bar Association, German re-insurance 
companies, English life insurance companies, German liability 
insurance companies, and by an elaborate brief presented by 
the Elders of the Association of Berlin Merchants. The facts 
and arguments submitted by these bodies, and many others, 
are evidence of the careful and impartial consideration which 
232 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

had been given to every important feature of the proposed 
law before the same was finally adopted. 

Over Two Years Allowed for Public Discussion. 

Upon this basis of fact and information the Government 
introduced a revised bill, which was submitted to the Imperial 
Parliament on the 14th of November, 1900. In other words, 
nearly two years were allowed for public argument and dis- 
cussion. Every important provision of the law was discussed 
at length, and with remarkable ability, in numerous articles 
in the technical insurance press, by lawyers of the highest 
standing, and by prominent economists and teachers of insur- 
ance science in German universities. The Government itself 
did not assume an attitude of hostility toward the companies, 
nor did it press for undue haste in advancing the bill through 
its different stages. The bill was read for the first time on 
November 29, 1900, and referred to a commission of twenty- 
one members for further consideration and report. This com- 
mission included some of the foremost experts in insurance, 
and during its twenty-six sittings every interest was given an 
opportunity to present facts and arguments for or against 
particular provisions of the law. A final bill, in a modified 
form, was submitted to the Imperial Parliament on April 20, 
1 90 1, so that there had been an intervening period of five more 
months for further public argument and discussion. 

Code Conforms to Expert Opinion and Business 
Experience. 

The report of the commission is a model of its kind and 
deserving of the most careful study and reflection by all who 
would like to see the conflicting statutory requirements in this 
country upon the subject of insurance harmonized, to the 
decided advantage of the insurance companies, their policy- 
holders and the state. In the final report of the commission 
every section of the proposed law is fully explained, not only 
in its immediate bearings upon the subject under consideration, 
233 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

but in its important relations to existing codes of commerce, 
bankruptcy, civil rights, crimes, etc. The arguments for and 
against particular provisions are printed in sufficient detail to 
afford an insight into the facts and principles governing par- 
ticular provisions of the law. The code as finally revised was 
submitted to the Reichstag during the latter part of April, and 
became a law on May 12, 1901. The law became effective on 
January 1, 1902, except such provisions as related to the organi- 
zation, etc., of the Imperial Supervising Insurance Department 
established by the code, which went into effect upon its passage. 

Scope and Purpose op the Imperial Supervising Insur- 
ance Department. 

The code is arranged in nine general sections and 125 
paragraphs. Important supplementary regulations were issued 
by the Federal Council, and approved by the Emperor, under 
date of December 23, 1901, which in thirty-six sections, govern 
the appointments and administration of the Imperial Super- 
vising Department established by the code. The first section 
is general and defines the scope and purpose of the law. The 
Imperial Supervising Department has complete control over 
everything directly or indirectly appertaining to the methods, 
management, or experience of the companies and associations 
subject to its jurisdiction. The supreme power of the Depart- 
ment rests primarily upon the exclusive right to grant authority 
for the transaction and continuance of business. The rights 
and duties of the companies or undertakings are, however, 
clearly defined by the code, and except for specific reasons the 
Department must issue the permission, or what, for want of a 
better term, may be spoken of as a license to carry on the 
business of insurance. 

Discretionary Powers op the Department. 

Insurance undertakings, to obtain authority to transact 
business, must submit to the Department a complete state- 
ment of facts and information to clearly establish the nature 

234 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

and purpose of the business to be transacted. The Depart- 
ment can decline to approve the application only when there 
is evidence (i) that the business plan is contrary to the law; 
(2) that the undertaking, for one of many reasons, may not 
be able to carry out its intentions or meet its present or 
future obligations; (3) when the proposed plan or method 
of insurance is contrary to public policy. To make sure that 
these requirements are complied with in all cases, a thor- 
ough preliminary investigation is made by the Department 
into all the facts presented, the object being, of course, to 
eliminate, if possible, at the very outset, inherently weak or 
possibly fraudulent insurance undertakings. In this respect 
the Department has been eminently successful. If a similar 
method were followed in the United States, every application 
for a new insurance charter would first have to be approved 
by the superintendent or commissioner of insurance. The 
provision of the German code is decidedly effective to eliminate 
wildcat, speculative, and fraudulent insurance enterprises. 

Safeguarding Policyholders' Rights and Privileges. 

As a further condition precedent to the required authority 
to transact business, the code defines the principles which 
must govern in the articles of incorporation or association and 
in the policy conditions. These may briefly be defined as 
emphasizing the necessity for a clear and specific statement 
of the respective rights and duties of the insuring company 
on the one hand, and of the insured policyholder on the other. 
The object, of course, is to provide both the stockholder and 
the policyholder with a readily understood statement of the 
conditions governing their relations to the company or associa- 
tion. No standard forms, however are, prescribed, nor is there 
an attempt at uniform regulation of the details of specific policy 
conditions. The law permits of a deviation from the general 
insurance conditions, but in cases where such changes may be 
construed as being contrary to the interest of the insured, as, 
for illustration, in the earthquake clause, the same must be 

235 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

clearly and fully explained for the information of the policy- 
holder, in which event the contract may be issued. In other 
words, there is no interference with contractual freedom on 
the one hand or with the liberty of legitimate business enter- 
prise on the other. Before a contract of insurance can go into 
effect a separate copy of the policy conditions must be handed 
to the prospective policyholder, who must give a receipt there- 
for in writing. This requirement, however, does not apply 
to open policies of insurance issued in conformity to the prac- 
tice of the Stock Exchange, the rules of which are applicable 
to strictly commercial agreements of this character. 

Special Requirements of Life Insurance Companies. 

On account of the more complex nature of the life 
insurance business, the code provides in detail for the safe- 
guarding of policyholders' rights, privileges, and interests. 
The business plan of a life insurance company or association 
is denned to include the premium rates and the principles of 
their calculation, the rate of interest, and the loading of the 
net premium. No specific table of mortality is required, nor 
a specific minimum or maximum rate of interest. The use 
of the preliminary-term method is permissible for the first 
year to the extent of $12.50 per $1,000 of insurance. The 
mortality table used in the calculations is required to be stated, 
and the same is true of tables bearing upon the probability of 
accident, liability, and sickness. Every division of the life 
insurance business, such as endowment, limited payment life, 
annuities, etc., must be explained in detail as to the formulas 
used in the calculation of premium rates and dividend appor- 
tionments, illustrated by examples in figures. If policies are 
issued at a higher premium, the business plan must show why, 
and on what principle, a special premium is to be charged. 

Continuous and Complete Supervision. 

The aim of the law is to provide the Supervising Depart- 
ment with all the necessary information to pass upon the in- 
236 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

trinsic value of the proposed insurance undertaking. The 
Department is fully equipped with experts of the highest stand- 
ing to render an impartial and trustworthy opinion upon the 
equity or technical soundness of proposed plans for insurance. 
All subsequent changes in the articles of association, or the 
policy conditions, or the business plan of the company', require 
the approval of the supervising authorities before the same can 
legally go into effect. As previously stated, the Department 
can decline to give its approval only upon the principles of 
equity, safety and public policy. In other words, the aim of 
the code clearly is to secure the highest degree of perfection in 
supervision as a basis of rational governmental regulation and 
control. There is no attempt to substitute, even in principle, 
State management of insurance undertakings on the one hand, 
or State responsibility for the fulfillment of contract obligations 
on the other. The Government interferes only in cases where 
there is evidence that the insurance undertakings are managed 
contrary to sound principles of equity and public policy. 

Organization of the Department. 

The Department has supervision over the entire business 
of insurance corporations and associations, and under the term, 
business plan, or method, is comprehended everything relating 
to the administration and the results of business experience. 
The domicile of the Department is at Berlin, where it is housed 
in a beautiful building especially erected for the purpose. The 
executive organization consists of a president, a chief director, 
five permanent members in the main department, four per- 
manent members in the auxiliary department, and three e%- 
officio members who are technically qualified experts in insur- 
ance. The technical and clerical staffs of the Department 
consist of some thirty employees. All of the appointments 
are of men thoroughly conversant with either the theory or 
practice of the business in any one or more of its different 
branches, and except in the case of ex-officio members, the 
appointments are for life. The salaries paid may be considered 

237 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

fairly commensurate with the very responsible duties dis- 
charged. All officers and employees are entitled to a pension 
in old age. 

Department is an Independent Administrative-Judicial 
Branch of the Government. 

The status of the Department is that of one of the superior 
courts, and its functions are both administrative and judicial. 
Specific rules of procedure govern the Department in practi- 
cally all important details. The Insurance Department forms 
a subordinate, but practically independent, branch of the 
Department of the Interior. Persons connected in an official 
capacity with State insurance undertakings are not eligible to 
office in the Department. To facilitate the administrative 
functions of the Department the appointment of local com- 
missioners is permissible, but these officials do not exercise 
independent functions. They are supposed to act in an advi- 
sory capacity to both the insurance companies and the Depart- 
ment. Thus far a very limited use has been made of this 
provision of the code. 

Department Assisted by Advisory Council of Insurance 
Managers and Experts. 

For the purpose of increasing the efficiency of the Depart- 
ment, and to secure to its decisions absolute impartiality in 
complicated or involved cases, the code provides for the appoint- 
ment of an Advisory Council consisting of recognized experts 
in the theory and practice of insurance. The Council consists 
of not less than forty members, who, if necessity requires, may, 
upon the request of the Imperial Chancellor, be increased to 
sixty by the Federal Council. They are appointed by the 
Federal Council for a period of five years, subject to the appro- 
val of the Emperor. Their duties are specifically defined in 
the code, the main object being to secure an outside, but thor- 
oughly qualified, expression of opinion upon complicated and 
difficult questions, chiefly such as require to be considered 
238 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

under the provision of the code relating to the right of appeal. 
The members of the Council have a right to vote in specified 
cases, but they can be brought into the consideration of pend- 
ing questions only upon the request of the president of the 
Imperial Supervising Department. 

Organization of the Advisory Council. 

The Advisory Council is divided into five groups: (i) Life 
and sickness insurance; (2) accident and liability insurance; 

(3) live-stock, hail and other forms of agricultural insurance; 

(4) fire insurance, including wind-storm, water-damage, and 
burglary insurance, and (5) all other brances of insurance or 
matters of a general character. The members of the Advisory 
Council may be appointed to more than one of the five groups. 
As illustrating the high character and pre-eminent qualifica- 
tions of the appointees to the Advisory Council, I may mention 
among others, Dr. Ehrenberg, a professor of insurance in the 
University of Gottingen and one of the foremost authorities 
on insurance theory in Germany; Dr. Emminghaus, a director 
of the Gotha, the foremost mutual life insurance society in 
Germany; the late Dr. Hahn, a general director of a prominent 
company, president of the German Society for Insurance Science, 
and president of the Fifth International Actuarial Congress; 
also Dr. Karup, actuary and mathematician of the Gotha and 
one of the highest authorities in actuarial science in the world. 
All the other members of the Advisory Council are, in one 
capacity or another, identified with insurance companies or 
insurance interests. The members of the Council hold their 
positions as an honorary employment, but they are reimbursed 
for their expenses if required to attend meetings at the office 
of the Department in Berlin. At all meetings the president of 
the Department, or his representative, presides. 

Departmental, Rulings, not Subject to Appeal. 

Against the decisions of the Department, as such, or of 
the Department in conjunction with the Advisory Council, 

239 



SUPERVISION AND GOVERNMENT CONTROL IN GERMNAY 

there is practically no appeal, except in so far that in important 
cases a rehearing will be granted, at which, however, the presi- 
dent of the Department is again the presiding officer, but from 
which other executive officers of the Department are excluded 
if they participated in the previous decision. Upon request, 
in very important cases, the Advisory Council participates in 
such cases, sitting as a court of appeal, whose decision is final. 
The fundamental principle which underlies this apparently 
somewhat arbitrary method of procedure, is that even the general 
superior courts would not, as a rule, be in a better position to render 
justice than a special court, constituted from within the De- 
partment, and sustained by an Advisory Council derived by 
careful selection from among the most qualified experts in the 
business of insurance. On the whole, in view of some eight 
years of actual experience, it may be held that the results have 
met with general approval, and the decisions of the Depart- 
ment have been in strict conformity to rational principles of 
procedure applied to a highly complex and involved branch 
of business enterprise. 

Effective Supervision at Minimum Cost. 

The expenses of the Department are provided for by the 
general budget. However, upon the theory that it is equally 
to the interest of the companies and their policyholders, as well 
as of the public generally, that the business should be effectively 
supervised and regulated by the Government, an annual pro 
rata levy is made by the Department upon the companies, 
subject to its jurisdiction, for one-half the sum required for 
its maintenance during the current year.* The contributions 

* During 1906 the expenses of the Department paid by the companies 
were assessed upon a premium income of 713,625,000 marks. The 
amount paid was 210,500 marks or at the rate of not quite 30c. per 
$1,000 of gross premium income. The previous year the rate was 0.298 
(1905), 0.292 (1904, 0.277 ( I 9°3) an( l °- 2 35 ( I 9 02 )- During 1909 the 
expenses^. were assessed upon a premium income of 900, 838, 631 marks, 
and the amount paid was 271,800 marks, or 30.2 cents per $1,000 of 
gross premium income. In 1908 the rate was 0.289. 
240 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

or fees are calculated upon the previous year's gross prem- 
ium income, deducting therefrom premiums paid in advance and 
amounts returned to shareholders or policyholders as profits 
or dividends. The expenses which may be assessed upon a 
company, however, are limited to a maximum of one-tenth of 
one per cent, of the gross premium income as previously defined. 
There are no other fees or charges of any kind, except that in 
cases where needless expenses have been incurred by the De- 
partment in behalf of special efforts to secure evidence or proof 
in the settlement of disputes or appeals, the charges may be 
assessed upon the complainant. 

Legal Status of Mutual Insurance Undertakings. 

The organization and management of mutual insurance 
undertakings take up nearly one-third of the code, and for the 
first time these companies in Germany have secured by statute 
the recognition of legal corporations entitled to the same judi- 
cial rights and privileges as incorporated stock companies. 
Incorporated trade unions having insurance features, miners' 
benefit funds, and friendly societies do not come within the 
provisions of the code. As a general principle, the provisions 
of the commercial code applicable to corporations generally are 
extended to mutual insurance undertakings. In future, however, 
all such companies or associations must conform to uniform 
rules laid down by the code and elaborated by the Super- 
vising Department. 

Regulations Governing Mutual Insurance. 

The organization of mutual undertakings, their manage- 
ment, election of officers, etc., are provided for by the code 
in a general way and without needless interference in matters 
of detail. All essentials, including the distribution of surplus 
to members and the payment of special compensation to the 
management, are governed by the commercial code the same as 
when applied to stock corporations. The regulations are admir- 
ably framed and have been universally commended and ap- 
241 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

proved by insurance interests generally. In the case of new 
organizations the code requires a special guarantee fund for 
the additional protection of the members, but provision is 
made for its gradual elimination. 

Under the provisions of the commercial code which apply 
to the insurance code, mutual companies or associations can 
be converted into stock companies by consent of the policy- 
holders. In practice there have been a number of such changes, 
with the approval of the Supervising Department, while to 
the contrary there never has been a case of a stock company 
being converted into a mutual institution. Qualified critics 
of these provisions of the code have not failed to point out the 
inherent difficulties of actual participation in the management 
through the membership, and on the whole, official as well 
as private opinion in Germany seems to decidedly favor stock 
corporations. In actual practice there has been no participation, 
nor even a serious interest of policyholders, in the management 
of large mutual insurance undertakings, for, as has been prop- 
erly pointed out, the members consider chiefly their contractual 
relations to the company or association as policyholders and 
not as members or partners in a commercial enterprise. 

Legal Status of Stock Companies. 

The legal status of stock life insurance companies is in 
part governed by the insurance code and in part by the general 
stock corporation law. For the adequate protection of stock- 
holders the companies are required to gradually accumulate 
a reserve out of profits otherwise unassigned. This reserve is 
in the nature of a stock dividend required by the stock cor- 
poration law, applicable to life insurance companies. At least 
five per cent of the annual net profits must be set aside until 
the capital reserve equals ten per cent, of the amount author- 
ized. It has been the general rule for many years, in the forma- 
tion of stock life insurance companies, to pay in about twenty 
per cent, of the authorized capital in cash, while for the re- 
mainder the personal notes of the stockholders are required to be 
242 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

deposited and made payable on demand. The intrinsic value 
of the notes must be periodically verified. In proportion, of 
course, as the capital reserve increases the individual liability 
of stockholders for the unpaid portion of their stock diminishes. 
This arrangement is covered by Section 262 of the commercial 
code, and a somewhat similar arrangement provides for the 
guaranty funds of mutual companies by Section 37 of tha 
insurance code. 

Dividends Paid by German Stock Life Insurance 
Companies. 

The annual business report of the Department for 1906 
includes some very interesting details regarding the author- 
ized and paid-up capital, stock reserve funds, and dividends 
paid to shareholders by German stock life insurance compa- 
nies in part as follows: 

There were twenty-four stock companies, or so-called large 
undertakings, which had about 1,400,000 ordinary policies in 
force, and a total income during 1906, of 303,272,000 marks 
($72,178,736). The authorized stock capital of these companies 
was in round figures, 156,000,000 marks ($37,128,000), of 
which, as far as it is possible to judge, only 35,000,000 marks 
($8,330,000) was paid in cash. For the unpaid balance of the 
authorized capital the shareholders are required to deposit 
fully secured personal notes payable on demand. For these, 
of course, they would become liable only in the event of failure. 
The commercial code requires the gradual accumulation of a 
stockholders' reserve equal to ten per cent, of the authorized 
capital out of profits not otherwise assigned, and something 
over 14,000,000 marks ($3,332,000) has been set aside for this 
purpose. Stock dividends are paid upon both the cash and the 
stock reserve, and in the aggregate during 1906 the twenty- 
four companies paid 6,060,000 marks ($1,442,280) as dividends, 
equal to about 17.3 per cent, of the cash paid in, and 12.4 per 
cent, when the stock reserve is included. 

243 



supervision and government control in germany 

Shareholders' Participation in Profits. 
I can not do better than use, for purposes of illustration, 
the case of a company selected at random, with an authorized 
capital of 9,000,000 marks ($2,142,000). Of this sum, twenty per 
cent, was actually paid in cash, while for the remainder the 
required demand notes were deposited. In the course of years 
the company has accumulated a capital reserve of 900,000 
marks ($214,200), or the full legal limit of ten per cent, of the 
authorized capital stock. Combining the amount paid in cash 
and the capital stock reserve authorized, the total is 2,700,000 
marks ($642,600), and upon this sum the company, during 1904, 
paid a cash dividend of ten per cent., or 270,000 marks ($64,260). 
The equivalent payment upon the cash actually paid in would 
be fifteen per cent. Another company, with an authorized 
capital stock of 17,142,000 marks ($4,079,796), of which only 
ten per cent., or 1,714,000 marks ($407,932) had been paid in 
cash, and which has accumulated a stock reserve of 1,714,000 
marks ($407,932) more, paid during 1904 the sum of 500,000 
marks ($119,000 )in cash dividends to shareholders, or at the 
rate of 14.6 per cent, upon the aggregate present cash capital, 
or 29.2 per cent, upon the amount of cash actually paid in. 

Companies May Pay Any Rate of Profit Actually 

Earned. 
The companies may pay any rate of profit provided the 
same is actually earned. The Supervising Department con- 
siders its duty at an end if it has been furnished with conclusive 
evidence that the amount paid in cash dividends to shareholders 
is actually available and has not been derived from other funds 
than the balance of net profits remaining after the payment of 
all other obligations. The code does not restrict the companies 
in this respect since stock life insurance companies are con- 
sidered from the same point of view as other commercial under- 
takings. In other words, if by reason of exceptional gain or 
profits resulting from executive or scientific methods of manage- 
ment, a balance of funds becomes available for distribution to 
244 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

the shareholders, the law does not fix a maximum rate of profit 
which may be realized upon the investments. There is in this re- 
spect, complete freedom of trade in life insurance the same as 
in other business enterprises. 

Stock and Mutual Companies May Transact Participating 
and Non-Participating Business. 

The code does not prohibit life insurance companies from 
transacting both a participating and a non-participating busi- 
ness. As a rule, German companies issue both classes of policies, 
but the participating business predominates. In 1904, of the 
policies payable in the event of death, in force with German 
stock companies, 82.9 per cent, were on the participating plan 
and with mutual companies 99.4 per cent.* Mutual companies 
are permitted to issue non-participating policies, but the policy- 
holders in such cases are not considered members. The non- 
participating rates are, as a rule, higher than the corresponding 
rates charged by American or English companies. Of the policies 
issued on the endowment plan, with stock companies, only 
thirty -two per cent, were on the participating plan, and with 
mutual companies, ninety-two per cent. As a rule, German 
mutual companies do not sell annuity contracts, but such as 
have been issued, with either stock or mutual companies, are 
nearly all on the non-participating plan. 

Status of Foreign Insurance Companies. 

Foreign insurance companies transacting business in Ger- 
many are subject to a separate division of the code, in seven 
sections. All such companies require permission or authority 
from the Department the same as domestic companies, but 
the final action of the Department is subject to approval by the 
Imperial Chancellor. This distinction, of course, rests upon 

*The 29 companies transacting life insurance in the State of Massa- 
chusetts had, in the aggregate, $13,753,542,000 of insurance in force, 
Dec. 31, 1909. Of that amount $10,190,724,000, or 74.1 per cent, was 
participating and $3,562,818,000, or 25.9 per cent, was nonparticipating. 

245 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

certain principles of international law and the practice of the 
Department of foreign affairs in its relations to the Governments 
of other countries. The conditions of admission, however, are 
practically the same as in the case of domestic companies, but 
the foreign company must appoint a representative with full 
power of attorney to act for it in an official capacity in all cases, 
including the signing of policy contracts and accepting service 
in the case of legal complications. The company must estab- 
lish a chief domicile in some one state, and in all its civil relations 
in questions arising out of the insurance contract it becomes 
subject to the local law. The company is also subject to the 
jurisdiction of the local courts in the first instance, and it is not 
permitted to waive this jurisdiction even by special agreement 
with the local government. The premium reserve which is prop- 
erly chargeable against the business of foreign life insurance com- 
panies transacting insurance in Germany must be kept and 
invested in Germany in such a manner that it can be disposed 
of only by permission or authority of the Department. The 
practical problems arising out of this provision of the law have 
not as yet been fully settled or determined. 

Insurance as a Problem in International Law. 

In its relation to foreign life insurance companies the De- 
partment, has, on the whole, been fairly tolerant and adjusted 
its requirements in the form of a reasonable compromise best 
adapted to meet the necessities of an exceptional situation. 
To leave free scope to the Government, however, in its relations 
to foreign powers, the Federal Council and the Imperial Chan- 
cellor are specifically authorized to act entirely according to 
their own discretion with respect to the granting of a concession 
or license to a foreign company transacting business in the 
German Empire. The Department, by implication, at least, 
would seem to have the right, and possibly the duty, of extending 
its supervisory powers into the domestic affairs of a foreign 
company, including an actual investigation into its condition 
at its home office. Treaty obligations between Germany and 
246 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

foreign powers respecting a reciprocal arrangement regarding 
insurance companies are not affected by the law, and they may, 
therefore, be made entirely in the discretion of the Government. 
Insurance is therefore strictly recognized as an element of com- 
merce and being subject to the control of the foreign office, 
it is governed in this respect by the principles of inter- 
national law. 

Adequate Fines and Penalties. 

The provisions of the code are adequate with respect to 
the necessary penalties for non-compliance with the law or the 
rules and regulations of the Supervising Department. In all 
essentials these conform to the established rules of procedure 
in criminal cases arising under the general civil and penal codes. 
Deliberately false or misleading statements to secure a conces- 
sion or permission to do business, or for the purpose of obtaining 
the approval of the Department in matters for which it is 
required, are punishable with imprisonment or a fine to the 
amount of about $5,000, while in addition the court can impose 
the loss of civil rights. Deliberately false or misleading state- 
ments regarding the funds of the company, or the character of 
its assets, or when, contrary to law, a division of profits to the 
insured or to the shareholders has taken place, or false keeping 
of books and accounts, or the investment and keeping of the 
premium reserve contrary to law, is punishable with imprison- 
ment for not more than six months, or a fine of not more than 
$500, or both. 

Departmental Powers Over Management. 

It is only with respect to life insurance undertakings that 
the code contains specific regulations for the general business 
conduct of the companies.. The most important of these relate 
to the reserve and the investments. To prevent speculation 
in real estate acquired for corporation purposes, the purchase 
of additional properties requires the approval of the Department 
except such as are necessarily acquired under foreclosure pro- 

247 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

ceedings. It is also held that the object of the law is to pre- 
vent the erection of expensive buildings, chiefly for adver- 
tising purposes. Should the Department refuse its consent to 
the purchase, the company has not the right of appeal. Foreign 
companies, in this respect, are under a double disadvantage, 
partly for the reasons stated, and partly for additional political 
reasons which oppose the acquisition of real estate by aliens. 

Departmental Powers Over Records and Accounts. 

To place the Supervising Department in a proper position 
to secure all the information required in the opinion of its 
experts to arrive at a necessary conclusion, the code extends 
to it every power, judicial as well as administrative, to secure 
the end in view. The Department has the right to examine 
into all the books, papers, vouchers, etc., of a company which 
may bear upon its investments or upon any other question, 
and it can demand information from any one of the employees, 
including agents, with respect to any material fact of admin- 
istration. 

Departmental Representation at Board Meetings of 
Mutual Insurance Undertakings. 

The code extends to the Supervising Department the right 
to be represented at the meetings of directors or trustees of 
mutual insurance undertakings by an officer of the Department 
and should it be necessary for special reasons, a meeting of the 
directors or trustees may be called by the Department, but 
at such meetings the Government representative presides 
over the proceedings. In practice the Department has not 
made much use of this provision of the law, and as far as I 
am informed, only in the case of mutual insurance companies. 
To carry this principle into execution in the case of many, 
or all of the insurance undertakings subject to its super- 
visory powers, would, of course, be impossible with the present 
organization. 

248 



supervision and government control in germany 

Discretionary Powers in Cases of Complaint. 

The Department may entertain complaints against insur- 
ance companies, but it is under no specific obligation to take 
action in such matters. It is admitted by the authorities, and 
the experience of the Department has verified this view, that 
such complaints are usually of an extremely trivial character 
or entirely without legal foundation. Most of these complaints, 
it is pointed out, arise in connection with the cash surrender 
Values of life insurance policies, where the practice of the com- 
pany is sometimes unintelligible to the insured. Upon inquiry it 
is usually found that the company has acted within its rights and 
according to the policy provisions, which of course, had been 
previously approved by the Department. Since most of such 
complaints arise out of the contractual relations between the 
insured and the company, they remain subject to adjudication 
by the civil courts. 

Annual Statements and Reports Required to be Made. 
The companies must annually make a report to the Depart- 
ment upon their business operations during the year, including 
a complete balance-sheet and revenue account. These must be 
prepared in accordance with the rules and regulations of the 
Department, issued under date of June 2, 1902, having been 
prepared after frequent consultation with the Advisory Council, 
consisting, as previously stated, of managers and experts thor- 
oughly familiar with the subject of insurance in all its branches. 
The books of an insurance company must be kept in conformity 
to Section 39 of the general commercial code. The accounts 
must include a gain and loss exhibit, which, however, quite 
fundamentally differs from the corresponding gain and loss 
exhibit required by certain states of the United States. The 
annual report must set forth the course and development of the 
business during the year and conform to certain fundamental 
principles although the same may be amplified according to the 
discretion of the company. The code provides that every 
policyholder, upon request, shall be furnished with a copy of 
249 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

the annual report. It is held that every reasonable requirement 
for the publicity of the essential facts of management and busi- 
ness experience is complied with and that any additional 
information would be most likely to confuse the public and 
furnish data more or less misleading for competitive purposes. 

Rules Governing Valuations. 

Special rules, based upon careful inquiry, and approved by 
the Advisory Council, govern the calculation and investment 
of the premium reserve. The reserve is properly denned as the 
foundation of the life insurance business. The code differen- 
tiates between the terms "Premium Reserve," and "Premium 
Reserve Funds." The distinction is not entirely clear. Under 
special conditions the law permits the use of the preliminary 
term, but no specific principle of mortality or rate of interest 
is laid down. The Department has published some very in- 
teresting contributions to the science of insurance, and par- 
ticularly a monograph on the mortality tables in general use 
throughout Germany, and another on the various systems 
of distributing surplus gains to policyholders under the par- 
ticipating contract. Of course, if the Department is satisfied 
that the mortality table used is inadequate, or that the rate of 
interest assumed is too low or too high, it can insist upon 
necessary changes according to its discretion. 

Actuarial Responsibility for Reserve Calculations. 

The reserve is required to be calculated for every business 
year and separately for each branch of insurance. The reserve 
may be calculated for individual policies, or by groups of iden- 
tical ages at entry, or according to the duration of insurance 
and the termination period of the contract. To provide for accu- 
racy in the calculation the same must be certified to in the 
balance-sheet by at least one thoroughly competent expert 
mathematician or actuary, who has to certify that the premium 
reserve as stated in the balance-sheet has been calculated 
according to the formula approved by the Department. For 
250 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

the accuracy of this statement the actuary or mathematician 
is held personally responsible, and the code provides adequate 
penalties in the event of a dereliction of duty. The management, 
however, remains also personally responsible for the accuracy 
of the calculations. 

Rules Governing Reserve Fund Investments. 

The code provides in a definite manner for the investment 
of the reserve, primarily in such funds as under the civil code 
are required for the investment of trustee funds for orphans 
and minors. Chiefly, of course, in mortgages and government 
obligations. The latter are not generally in much favor in that 
under the commercial code their value has to be stated on the 
last day of the year according to the Stock Exchange quotations 
on that day. Since by mere accident an exceptionally low price 
might prevail on that day, the true value of the investment 
might be materially understated. Up to ten per cent, of the 
reserve may be invested in collateral loans upon mortgages 
and securities, but in the case of the latter only to the 
extent of seventy-five per cent, of the par value, and if the 
market price is below par, to the extent of seventy-five per 
cent, of the same. Mortgage loans must not exceed sixty 
per cent, of the carefully appraised value of the property. 
Loans can only be made upon improved and productive prop- 
erties and not upon buildings in course of construction. Invest- 
ments of the reserve may also be made in policy loans, which, of 
course, are safest as well as, in a measure, most profitable to the 
company. Loans may also be made, but only to the extent of a 
small proportion of the aggregate, in the obligations of counties, 
municipalities, schools, and churches, provided they are subject 
to a definite method of amortization. Investments of funds of 
this character, however, require the approval of the Depart- 
ment. If no immediate investment of the reserve can be made 
in the required class of securities, the money may remain with 
the Imperial Bank, or a State Bank, or a bank specifically 
approved by the Department, or a public savings bank. 

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supervision and government control in germany 

The Separate Accounting and Keeping of the Reserve 
Funds of Life Insurance Undertakings. 
One of the innovations of the code is the requirement that 
the securities or documents representing the reserve fund, must 
be kept absolutely separate and distinct from any other funds 
of the company, and they are generally placed in a separate 
safe to furnish visible evidence at any given time that the reserve 
is actually kept intact for the ample protection of the interests 
of the policyholders. The separate administration of the two 
funds, that is, of the reserve and the remainder of the company's 
assets, is also required to secure to the policyholders, in the 
event of bankruptcy or liquidation, the rights of preferred 
creditors. The investments representing the reserve are re- 
quired to be accounted for in a separate register. This must 
identify the individual securities, mortgages, or other evidences 
of property in such a manner that there can be no doubt as to 
the company's undisputed right to the property. In the 
case of other securities, the description must be individual 
and complete, including the serial number of the same, and 
the only exception where the facts may be stated in a 
lump sum is in the case of policy loans. At the end of every 
year the company must furnish a certified copy of the list of 
securities for the permanent records of the Department. It is 
specifically provided that no funds shall be taken from the 
reserve for administration expenses, the payment of dividends, 
etc. Of course, this regulation does not bear upon the use of 
the preliminary-term plan, which is permitted for the first year 
to the extent of $12.50 per $1,000 of insurance. 

Time Allowed for Necessary Changes in Methods. 
To carry the preceding rules and regulations into effect, 
a period of three years was allowed to the companies to provide 
for a separation of the premium reserve funds from the remain- 
der of the company's assets, while a period of five years was 
allowed for compliance with the investment provisions of the 
code. 

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supervision and government control in germany 

Annual Reports of Supervising Department. 
The Supervising Department is required annually to pub- 
lish a report of its administration, supplemented by a prelim- 
inary statement of the more important facts of the business 
experience of large insurance undertakings. The report for 
1906, is dated May 31, 1907, and was published during the 
early part of August. It makes a compact volume of about 
250 pages full of interesting and valuable information. In its 
reports and publications the Department limits itself to a state- 
ment of essential facts sufficient for public purposes. It refrains 
from giving publicity to information which, in all probability, 
would be used for improper competitive purposes to the detri- 
ment of the business and the public. While the Department 
requires complete information of all undertakings subject to 
its jurisdiction it gives publicity to only a portion of the facts 
collected. In the opinion of qualified experts, the distinction 
between information useful to the public, and information 
strictly for the confidential and discretionary use of the Depart- 
ment, has been admirably well drawn, and for this solution of a 
difficult question it is understood the Advisory Council of the 
Department was chiefly responsible. 

Extent of Supervision. 
On May 31, 1907, the Department had supervision over 
1,219 insurance undertakings transacting the business in its 
various forms. Of the just mentioned total, 73 were foreign 
companies, the number of which has remained about the same 
since 1904. Evidently the effect of the code has not been to 
attract foreign companies to Germany as a field for the further 
development of their business. Of the 1,146 domestic insti- 
tutions, 446 transacted interstate business. Since most of the 
companies have their domiciles in Prussia, which forms about 
two-thirds of the area of the German Empire, many undertakings 
by limiting their operations to that State, are, therefore, not 
within the jurisdiction of the Department. Since a State is 
permitted to arrange for the Imperial supervision of local com- 

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SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

panies, various States, and the free city of Bremen, have done 
so, and some seven hundred insurance undertakings are super- 
vised and controlled in this manner the same as companies 
engaged in interstate business. Of the 446 domestic insti- 
tutions engaged in interstate business, 235 transacted life, 21 
accident, 78 hail, 62 fire and 50 other forms of insurance. Of 
the seven hundred institutions subject to the supervising powers 
of the Department by the voluntary surrender of State author- 
ity, 118 were life, 513 hail, 5 fire, and 1 miscellaneous insurance 
undertakings. Of the 73 foreign companies, 22 were life, 5 
accident, 40 fire and 6 miscellaneous undertakings. 

Premium Income of Insurance Undertakings. 

The total premium of the companies subject to the juris- 
diction of the Department was not quite two hundred million 
dollars, of which a little less than ten per cent, was the income 
of foreign companies. Of the total premium income, fifty-five 
per cent, was from the life branch of the business. The over- 
shadowing importance of life insurance is due primarily to the 
fact that most of the fire insurance, in some form or other is 
managed by the State or by local companies not subject to the 
jurisdiction of the Department. The aggregate assets of under- 
takings subject to the rules and regulations, and judicial de- 
cisions of the Department, exceed two thousand million dollars, 
for the accurate reserve calculations of which, and safe invest- 
ment, the Department is in a large measure responsible under 
the law. In due recognition of this fact the Department takes 
its duties very seriously, and properly so, and takes no step 
in any direction which it might perhaps be required to retrace. 
Thus far its judicial decisions have stood the test, and it is sig- 
nificant that while the code was passed in 1 901, no amendments 
have been made to the law during the intervening period of time. 

Invested Assets. 
The report for 1906 gives much space to a critical consider- 
ation of the aggregate investments of insurance companies, 

254 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

seventy-one per cent, of which represent mortgage loans. The 
companies are required to inform the Department semi-annually 
in detail regarding new mortgage loans, and during 1906, 
eighty-seven institutions reported 3,445 mortgage loans, for 
the sum of 357,000,000 marks ($75,966,000). The report prop- 
erly points out the intimate relation of such loans to real estate 
values and public credit. The report includes a table showing 
that most of the loans realized four per cent., interest but a 
fair proportion paid as much as four and one-eighth per cent, 
and four and one-quarter per cent., while a few were made at as 
low a rate as three and three-quarters per cent, and as high as 
four and one-half per cent. The usual rate of commission paid 
as part of the consideration in the making of mortgage loans 
was one-half per cent., with a maximum rate of three per cent. 

Mortgage Loans on City Real Estate. 
Most of the mortgage loans were on city real estate, and 
out of 3,409 mortgages, 1,169 or 34-4 P er cent., were placed in 
the city of Berlin and suburban sections. Of the remainder, 
1,153 were placed in Prussia and 225 in the Hanse towns. This 
concentration of real estate loans upon a comparatively small area 
would hardly seem to stand the test of impartial critical con- 
sideration. The local conditions, however, must be taken 
into account as regards loans upon landed estates or agricul- 
tural properties, which are, as a rule, either over-mortgaged 
or very fluctuating in value. Both the code and the rulings 
of the Department decidedly favor mortgage loans in the busi- 
ness section of large cities, but it seems that the area of such 
investments is not as large as, would be desirable. One argu- 
ment which has been advanced in favor of this practice, is that 
the appraisal of real estate is more accurate or more in pro- 
portion to the true value of the property in large cities than in 
the small communities, which is probably true. 

Effective Supervision of Mortgage Loans. 
The Department exercises complete and continuous super- 
vision over the mortgage loans and keeps a card index, by cities 

255 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

and streets, of all properties loaned upon. It requires to be 
informed of the sale price of any property mortgaged, as a 
check against a possible overvaluation. The report divides 
such sales according to the method of appraisal — that is, whether 
private or public, and it is shown that during the last three 
years, 1904-1906, of properties privately appraised, 18 per cent, 
realized over 100 per cent, of the appraisal; while of properties 
officially appraised, 68 per cent, realized more than 100 per 
cent. Recalling that the companies are permitted to loan only to 
the extent of 60 per cent, of the appraised value, it is shown that 
in the case of properties sold, and which had been privately 
appraised, about 23 per cent, brought between 60 per cent, 
and 80 per cent, of the appraised value, while of properties 
officially appraised, less than 1 per cent, came within this 
range of valuation. The statement is significant as illustrating 
the care employed to secure a really trustworthy valuation of 
properties loaned upon, and by means of an accurate card 
catalogue the Department is in full possession of all the facts 
at any given time to trace a possibly speculative tendency 
on the part of any particular insurance undertaking to loan 
in any particular section of a city in excess of the true 
value of the property. 

Supervision of Reserve Funds. 

On December 31, 1906, the five-year period during which 
the companies could perfect the necessary changes for the 
investment of their reserve funds in conformity to the code, 
expired. The provisions of the law distinguish between the 
separation of the reserve funds, their separate calculation 
according to stated principles, their separate investment, and 
the separate keeping of the securities. The rules governing 
the reserve calculations, and the keeping of the registers or 
accounts of the valuations, are the result of extended delibera- 
tion and joint consideration of the Supervising Department 
and the Advisory Council. In the first draft of the code it had 
been proposed to require the companies to send their reserve 
256 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

registers in the original to the supervising office, but this was 
later modified, and only a copy, properly authenticated and 
sworn to, is required. The results of this practice have been 
entirely satisfactory. Compared with the demands upon Amer- 
ican life insurance companies by the insurance departments of 
the different States, the requirements of the German Depart- 
ment are very moderate indeed. 

Reserve Investments of Companies Transacting Business 
in Foreign Countries. 

A difficult question confronts German companies transact- 
ing business abroad, and which, in compliance with foreign 
regulations, can not, as a matter of course, comply with dif- 
ferent regulations at home. While the code apparently leaves 
no alternative but to insist upon the same method of invest- 
ment of funds, representing the reserve in foreign business, the 
Department, within its power of discretion, effected a compro- 
mise, under which the companies are permitted to invest the 
full reserve on foreign business in conformity to foreign laws. 
A similar problem confronts the Department with respect to 
foreign companies transacting business in Germany, but here 
also a compromise has been reached fairly favorable to the 
companies. It is evident, however, from the tone of the report, 
as well as from the practice and rulings, that foreign life insur- 
ance companies are not desired in Germany. 

Complaints. 

During 1906 the Department considered 534 complaints 
of a varied character, most of which, however, related to the 
contractual relations of the compa lies and their policyholders, 
being, as such, subject to ultimate settlement in the courts. 
The Department, however, used its best endeavor to arbitrate 
differences and bring about a better understanding, and in a 
large number of cases it would seem this method proved effective 
and a preventive of needless litigation. In the case of life 
insurance, it is pointed out that most of the complaints had 

257 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

to do with paid-up values and dividends through a misunder- 
standing on the part of the insured of the contract obligations 
contained in his policy. Of 231 complaints arising under life 
insurance contracts, 61 were disposed of without correspondence 
or a hearing of the companies interested, 118 were disposed of 
by a single inquiry, while 34 involved more extended considera- 
tion. The report points out that the Department had occa- 
sion to insist upon modifications of policy conditions, applica- 
tions, advertising literature, etc. It also found it necessary 
to call the attention of the companies to a better supervision 
of the agency force as a most effective means to prevent mis- 
understandings with the insured. 

Inquiries. 

During the year 1906 there were 320 inquiries, including 
the most varied questions, many of which in their nature also 
involved the contractual relations of policyholders and insur- 
ance companies. Seventy of these inquiries related to the 
solvency of American companies, and in all of such the Depart- 
ment repeated its former advice that no evidence had been 
presented to prove that the American companies were not 
fully able to meet their obligations. Other inquiries related to 
the San Francisco earthquake, liquidations, new concessions, 
explanation of policy provisions, etc. 

Life Insurance Problems. 

Extended consideration is given in the report for 1906 to 
various problems of life insurance theory and practice. Among 
others, the question was considered as to whether a life insur- 
ance company should be permitted to calculate its premium 
rates upon the results of its own experience or be required to 
adhere to some standard table in general use. The question 
came up in connection with recent and very extended investi- 
gations of the Gotha and the Leipziger (Lebensversicherungs 
Gesellschaft auf Gegenseitigkeit, Alte Leipziger) life insurance 
companies, both of which are among the oldest and best 
258 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

managed, insurance undertakings in the world. The Depart- 
ment ruled that the companies in question could safely use 
their own experience as being, probably, better adapted to their 
specific requirements than the tables of mortality in general 
use. The question of dividend apportionment also received ex- 
tended consideration, and it was emphasized that the companies 
should, as far as possible, conform their preliminary estimates to 
the probable future results to be realized in actual experience. 
The dividend systems in use by German companies differ in 
many essentials from those in use in the United States, but 
practically all are on the deferred plan to this extent, that no 
dividends are paid during the first five years of policy duration. 
The dividend payments are, as a rule, on the annual plan, be- 
ginning with the sixth year. The dividend paid in the sixth year 
represents the gain realized upon the first year of insurance and 
so on. Even the preliminary-term plan in such cases admits of 
a dividend which has been actually earned, being paid in the 
sixth year of insurance. In the event of death the dividend 
gains or accumulations during the five preceding years are 
forfeited and revert to the general dividend fund. 

Life Insurance op Children. 

The report contains a lengthy discussion of the various 
methods of insuring the lives of children, with observations 
upon the systems in use in England, the United States, and 
other countries. The Department concludes, after careful 
investigation, that there is no necessity for entirely prohibiting 
the insurance of children as has been the case in France, Bel- 
gium, and Colorado, but that a maximum amount should be 
fixed by law, beyond which the companies should not be per- 
mitted to insure a sum payable in the event of the child's 
death. The Department holds that, as far as possible, the 
amounts should conform to the expenses of the last medical 
attendance, the burial and other expenses incidental to the 
child's death. The subject is being considered in connection 
with the preparation of a code governing the private or con- 

259 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

tract law of insurance, and it is quite probable that a fixed 
table of amounts will be included the same as has been done 
in England, Australia, and in New York and other States of this 
country.* 

Miscellaneous Insurance Problems. 

The report considers the question of insurance without medi- 
cal examination, so-called net-cost estimates, life insurance in 
connection with store purchases, or with savings banks, etc. The 
Department holds it to be unwise to combine life insurance 
with any other commercial elements or undertakings although 
it has not thought it necessary to prohibit such undertakings 
but has merely advised against their expediency. Among 
other subjects, the report considers pension funds, American 
life insurance investigations, accident and liability insurance, 
agricultural insurance, etc. In each case the more important 
questions are fully explained to emphasize the Department's 
point of view and the reasons go verning decisions or rulings for or 
against particular practices. 

Fire Insurance and the San Francisco Earthquake. 
Extended consideration is given to the San Francisco 
earthquake and the complex problems arising out of a proper 
construction of the earthquake clause. The report points out 
that there were six German companies transacting business 
in California, mostly under the New York standard policy, 
which does not contain a clause of non-liability in the event 
of earthquake or destruction of buildings by dynamite, etc. 
In the aggregate the companies paid out 31,000,000 marks 
($7,378,000) in losses. The companies, by special arrangement 
paid within about fifteen per cent, to twenty-five per cent, of 
the actual loss sustained. Three of the companies, which 
resisted all liability, were required by the Department to sub- 
mit a full statement of the facts, and after due consideration of the 

♦The code here referred to was enacted in 1908 and a maximum 
table of amounts governing the insurance of children was incorporated 
therein, conforming in its essentials to the New York law. 
260 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

contractual relation of the parties it was ruled that the respec- 
tive rights could be determined only by the courts. The De- 
partment insisted, however, that in the future there should be 
more clearness and a more pointed explanation of any clause 
limiting the liability of a fire insurance company in cases of 
exceptional contingencies, so as to secure to the policyholders 
the largest amount of protection. With the exception of one 
or two, all of the companies later came to an agreement with their 
clients, and perhaps in no single instance was the efficiency 
of the Department better illustrated than in this. Some very 
important questions of international private law are involved 
in this matter, which emphasizes the importance of insurance 
as an international institution and the necessity, as far as 
possible, for uniformity and harmony in insurance legislation 
throughout the world. 

Administrative and Judicial Functions of the Supervising 
Department During 1906. 

During the year the Department held three general execu- 
tive meetings and twenty-one open or public meetings, at which 
133 decisions affecting insurance undertakings were rendered. 
Of the twenty-one public meetings, six affected life insurance, 
four accident, four agricultural, five fire, and two other insur- 
ance undertakings. During the year the Advisory Council 
held one general meeting, and five section meetings, for each 
of the divisions into which the work of the council is divided. 
In eighteen cases members of the Advisory Board were indi- 
vidually consulted for advice. The Department continued the 
collection of important court decisions involving insurance 
companies and their relations to the policyholders, and by 
the end of 1906 a total of 774 such decisions, by a special 
arrangement with the courts, had been received by the 
law division of the Department. Of these, 270 were published 
in part, with the necessary explanations for ready reference 
as well as for the information of insurance companies. There 
were nineteen applications for approval to purchase real estate 
261 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

for office purposes, and of these seventeen were granted, while 
two were withdrawn. In eighteen cases an extension of time 
was granted for the separation of the reserve funds from other 
assets as required by the code, chiefly, as I understand it, in 
the case of small undertakings. 

Departmental Examination of Insurance Companies. 

The Department made forty-nine local examinations of 
insurance companies, or eighteen more than during the pre- 
ceding year. Of this number forty were carried on in the 
offices of the companies, four at general agencies of inland 
undertakings, and five at general agencies of foreign companies. 
Of the forty-nine examinations, eighteen were of life insurance 
companies. Thirty-four of the examinations were considered 
a general business revision, while fifteen were partial or limited 
to the determining of special facts. While there were forty- 
nine examinations, these affected only forty-seven undertakings, 
of which fifteen were stock companies and thirty-one were 
mutual companies or associations. One apparently did not 
come within either of these two classes of corporations. The 
examinations took up 276 days, and including the subsequent 
Departmental consideration, consumed a large amount of the 
time of the Department during the year. As far as it is possible 
to judge, the examinations proceed upon somewhat different 
principles than those in vogue in this country, and do not 
enter into matters of detail to the extent as is the case over 
here. This, of course, in part is due to the fact that the De- 
partment is already in possession of a mass of information and 
data regarding the methods and experience of the companies 
subject to its jurisdiction. The entire expense of examinations 
is paid by the Department. 

Procedure in the Consideration of Pending Cases. 

The consideration of questions and problems arising under 
different provisions of the code is arranged in ten groups. 
Limiting the present discussion to only such undertakings as 
262 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

were subject to the jurisdiction of the Department on account of 
being engaged in interstate business, there were in the aggregate 
575 cases considered, of which 429 were disposed of, leaving 
146 remaining at the close of the year. Of these, fifty-six had 
been disposed of by the end of May, 1907. Some of these cases 
had been under consideration for several years, and the pro- 
cedure in many is necessarily slow. Of the 429 cases disposed 
of, thirty-two had to do with applications for authority to do 
business; 123 with the Department's approval of changes in 
articles of association, by-laws, etc., pertaining to the organ- 
ization of insurance undertakings; eighty-eight with changes 
in policy conditions; forty -one with changes in premium rates; 
thirty -one with the introduction of new methods or branches of 
insurance by existing undertakings; twenty-seven with the 
territorial extension of business operations to other States; 
thirty-three with the extension of operations under other pro- 
visions of the code; seven with amalgamation; three with liqui- 
dations of mutual insurance undertakings and forty-four with 
the provision of the code defining small insurance enterprises. 

The Duty of Publicity 

The action of the Department in all important cases arising 
under the various provisions of the code is fully explained in 
an extended review forming part of the annual report. By 
this means an extremely valuable, continuous record of the 
work of the Department is preserved and made readily acces- 
sible to the companies and the public. The Department appears 
to recognize the fact that the duty of publicity is a mutual one, 
as much being required of the companies on the one hand as 
of the Department on the other, while at the same time there 
is an absence of needless publicity of facts or information 
likely to be used for improper competitive purposes. 

The Question of Taxation. 

The subject of taxation is so large and involved that it 
precludes adequate presentation in a discussion of this kind. 

263 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

The taxation of insurance companies in Germany is left as 
formerly to the States or local administrative powers. Except 
for the difficulties arising out of a needlessly complex system 
of stamp taxes of which as many as three may be imposed 
upon one transaction, the tax problem is not a very serious 
one. As has been said, the cost of Imperial supervision is 
less than thirty cents per $1,000 of gross premium income. 
The total taxes paid by large insurance undertakings during 
1905 amounted to 2,260,000 marks ($537,880) out of a gross 
premium income of 787,000,000 marks ($187,306,000). In 
other words, the rate of taxation was $2.87 per $1,000 of 
premium income. Considering life insurance companies sepa- 
rately, the rate was $2.33; accident and liability companies, 
$3.69; and of fire insurance companies $3.77. It may be said 
in this connection that during 1906 American life insurance 
companies alone paid nearly $11,000,000 in taxes, fees, etc., 
equivalent to 2.1 per cent, of the premium income. Had the rate 
of life insurance taxation in this country been the same in 1906 
as in Germany, over $8,000,000 would have been saved to policy- 
holders of American life insurance undertakings.* 

Conclusions. 
Government regulation of insurance in Germany is simple 
and effective. The complete supervision of the companies is 
obtained at a minimum of interference and expense. The 
code is in marked contrast to our own conflicting, costly and 
constantly changing system. In time, no doubt, we shall realize 
the futility of State legislation and State interference carried to 
the extreme. Some day we shall return to our earlier political 
ideal that "the government which governs least is the govern- 
ment which governs best. Efforts making for uniformity in 
insurance legislation will be to small purpose until existing 
statutory requirements are radically revised and reduced to a 

* For an interesting comparison of the American and German system 
of life insurance taxation, see the address by Mr. John F. Dryden, re- 
published in Addresses and Papers, Newark, N. J., 1910, pp. 165-6. 
264 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

more simple, but at the same time more effective system. The 
essence of all law, it has very properly been said, is necessity, 
and only when law making is limited to absolutely essential 
needs is there a reasonable certainty that the legislation will 
prove effective and permanent. 

The German code has not been amended or changed since 
it went into effect some six years ago; the Austrian regulations 
have not undergone a change during the past eleven years and 
they are practically identical with the regulations which have 
been in force since 1880; the Swiss laws have remained prac- 
tically the same since first adopted in 1885, or over twenty years 
ago. In brief, these codes conform to the dictum of Mr. James 
Bryce that "The chief merit of a rule of law is that it should 
seize a feature which a large set of instances really have in 
common and should effectually provide for them and for them 
only,"* and of no legislation is this more important than of the 
statutory requirements of the business of insurance.! 

During the last ten years American legal reserve life 
insurance companies have made a direct return to the different 
States of some eighty million dollars in taxes, licenses, fees, etc. 
For every dollar paid in taxes, etc., by American policyholders, 
the German policyholders have paid fourteen cents. The con- 
stant changes in statutory regulations, and the ever-increasing 
burdens of taxation are a serious menace to the business, but fully 
as much are the frequent changes in supervising officials. There 
is an imperative necessity for permanency in insurance law 
and permanency in the tenure of office of the insurance com- 
missioner or superintendent charged with the execution of the 
law. In these and other matters it would seem that we may 
learn much from a critical and impartial study of foreign insur- 

* Studies in History and Jurisprudence, by James Bryce, D. C. L. 
Oxford University Press, 1904. 

f For an interesting account of insurance supervision in Europe, as 
viewed by an American Insurance Department official, see the Report 
by Chas. Hughes, Chief Examiner of the New York Insurance Dep't, 
Albany, 1910. 

265 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

ance legislation, but perhaps most of all from the scientific 
codes of law on insurance, enacted by the German Empire in 
1901 and 1908. 

REFERENCES. 

1858 Staudinger, Rechtslehre ueber den Versicherungsvertrag. (Er- 

langen.) 
1865 Doehl, Das Versicherungswesen des preussischen Staates. (Berlin.) 
1 87 1 Schmidt, Louis, Das Versicherungswesen, Chap. IX. 
1880 Die Elster, Lebensversicherung in Deutschland. (Jena.) 
1885 Ruediger, Die Rechtslehre vom Lebensversicherungsvertrag. 

(Berlin.) 
Zavicza, 1st Staatsaufsicht ueber das Versicherungswesen in 

Deutschland einzuf uehren ? (Berlin.) 
1900 Dohrn, Unwirksamkeit und mangelhafte Wirksamkeit des Ver- 

sicherungsvertrages. (Goettingen.) 
Hager, Die oeffentlich-rechtlich Regelung des Privatversicher- 

ungswesens in Deutschland. (Berlin.) 

1900 Bericht der VII. Kommission betreffend des Entwurfs eines 
—01 Gesetzes ueber die privaten Versicherungsunternehmungen. 

(Berlin.) 

1 90 1 Manes, Das Reichsgesetz ueber die privaten Versicherungsunter- 

nehmungen. (Leipzig.) 

Koenige, Gesetz ueber die privaten Versicherungsunternehmungen. 
(Berlin.) 

Neumann, Gesetz ueber die privaten Versicherungsunternehm- 
ungen. (Berlin.) 

1902 Zehnter, Erlaeuterungen zum Reichsgesetz. (Berlin.) 
Deybeck, Reichsgesetz ueber die privaten Versicherungsunter- 
nehmungen. (Leipzig.) 

Naundorff, Reichsgesetz ueber die privaten Versicherungsunter- 
nehmungen. (Leipzig.) 

1903 Moldenhauer, Die Aufsicht ueber die privaten Versicherungs- 

unternehmungen. (Leipzig.) 
Kritik des Gesetzentwurfs ueber den Versicherungsvertrag Be- 
richte und Debatten auf der Mitglieder-Versammlung des 
Deutschen Vereins fuer Versicherungs-Wissenschaft. Berlin, 
1904. 
1906 Begruendung zu den Entwuerfen eines Gesetzes ueber den Ver- 
sicherungsvertrag eines zugehoerigen Einfuehrungsgesetzes 
und eines Gesetzes, betreffend Anderung der Vorschriften des 
Handelsgesetzbuchs ueber die Seeversicherung. Berlin, 1906. 

266 



SUPERVISION AND GOVERNMENT CONTROL IN GERMANY 

1908 Moldenhauer, Die Entwickelung der deutschen Volkswirtschafts- 

ehre. (Leipzig.) 

Gesetz ueber den Versicherungsvertrag nebts dem Einfuehrungs- 
gesetze und dem Gesetze betreffend Aenderung der Vorschriften 
des Handelsgesetzbuches ueber die Seeversicherung. Berlin, 
1908. von Dr. jur. C. Neumann. 

Kommentar zum Deutschen Reichsgesetz ueber den Versicher- 
ungs-Vertrag, von Stephan Gerhard, Otto Hagen, Hugo v. Knebel 
Doeberitz, Hermann Broecker and Alfred Manes. Berlin, 1908. 

1909 Gruner, Beaufsichtigung der Vers. Anstalten vom techn. Stand- 

punkte. Vereinheitlichung der Vorschriften. (Berlin.) 
Die Entwickelung des privaten Versicherungswesens unter Reichs- 

aufsicht in dem Jahrfuenft 1902 bis 1906. (Berlin.) 
Geschaeftsbericht des Kaiserlichen Aufsichtsamts fuer Privat- 

versicherung. (Berlin.) Annual Reports, 1902-1909. 

1 910 Veroeffentlichungen des Kaiserlichen Aufsichtsamts fuer Privat- 

versicherungen 190 2-1 9 10. (Berlin.) 



«67 



CHAPTER VI 
THE TAXATION OF LIFE INSURANCE INTERESTS. 

The theory and practice :: insurance taxation is rarely 
referred to in the text -books on taxation and the reports of tax 
commissioners, yet the taxation of insurance interests increases 
from year to year until a point has been reached where addit- 
ional burdens are likely to imperil the future of the business. 
To a large extent this indifference to a scientific study of the 
problem of life insurance taxation is due to the fact that life 
insurance is a most complex business, and taxes have as a rule 
been imposed in ignorance of the real nature of the insurance 
contract. The discussions before tax commissions, in State 
Legislatures and Congress are proof that to the average legis- 
lator there is but one viewpoint of the matter, and that is 
the vast accumulation of assets held by companies for the 
future discharge of their liabilities. What :s seen is the mil- 
lions of dollars of funis: what is not seen is the ::rresr :ni:rg 
liability charged arair.s: :hese funis: ani because ::" the incHf- 
erence to the latter, taxes are recklessly imposed and funds are 
diverted from their proper purpose until a point has been 
reached where the returns to policy-holders have diminished, 
where the cost :: insurance has been increased, where the 
economical extension of the business has been made more 
irfficult and where the future :: the business is threatened 
unless a complete change in public opinion :s brought about as 
to the proper scope and limits :: the taxation of life insurance 
interests. 

The taxation :: life insurance involves the present and 
future welfare of a large and increasing proportion of our 
population, representing the most intelligent, industrious and 
268 



THE TAXATION OF LIFE INSURANCE INTERESTS 

thrifty of our nation. Briefly stated, there are to-day (1909) 
in this country, 28,000,000 policies in force in ordinary and 
industrial level premium companies, which require annually in 
the aggregate the payment of more than $565,200,000 in pre- 
miums. Of this vast sum, representing an almost inconceivable 
amount of prudence and self-denial, over $12,000,000 is paid 
to the national government, the state or the municipality, in 
taxes or license fees of one form or another. In other words, 
out of every $100 collected in life insurance premiums, $2.15 is 
paid in taxes; or, if we consider the payments made to policy- 
holders, which now exceed $360,730,000 per annum, $3.36 is 
paid in taxes for every $100 paid to the beneficiaries of life 
insurance policy-holders ! 

If it is true of the general theory and practice of taxation 
in this and other countries that "It will be difficult to find 
in the whole realm of political economy a subject more gener- 
ally misconceived, more disfigured by false views, more de- 
graded by a partial study" ; this is especially true of that branch 
of the subject which relates to the taxation of life insurance 
interests. It is not going too far when it is maintained by 
those who have given much thought to the subject, that life 
insurance in this country is to-day one of the most heavily 
taxed institutions making directly for the welfare of the people 
and for the diminution of public burdens which would 
have to be provided for by taxes upon other interests. 
While erroneous views on this subject are due in a large 
measure to the intricate nature of the life insurance business, 
they are more largely due to the fact that the vast accumu- 
lations of life insurance companies represent an exceptional 
opportunity for the raising of public revenue with a certainty 
of its collection. 

A Tax Upon Thrift. 

The utmost publicity is given by law to all the essential 

facts pertaining to the business; the amounts of premiums 

collected, the amounts of dividends paid, the amounts of assets 

and of surplus accumulated, are given in full in the annual 

269 



THE TAXATION OF LIFE INSURANCE INTERESTS 

statements of the companies to the different insurance depart- 
ments. Nothing unfortunately is of more common occurrence 
than on occasion of local need for additional revenue to de- 
mand an additional tax upon life insurance interests, and yet 
it requires but a brief consideration of the real interests in- 
volved and of the real nature of the business, to make it clear 
to those free from bias or prejudice that taxes upon life insur- 
ance are a tax upon prudence, a tax upon thrift, a tax upon a 
business which should be free from all burdensome restrictions 
to enable it to develop and to expand to the highest degree 
of possible usefulness. 

It is one of the most common errors in the theory of life 
insurance taxation to assume that life insurance itself repre- 
sents capital. Now, capital is realized wealth, while life insur- 
ance is merely a promise to pay a certain sum in the event of 
the occurrence of a contingency provided for in the policy. 
Life insurance is a present means of obtaining a certain advan- 
tage over an uncertain future event, and it is on this ground, 
though not on this ground alone, that life insurance or the 
premiums paid for insurance protection should not be considered 
a proper subject of burdensome taxation. If we inquire into 
the objects and nature of life insurance and the relation of life 
insurance to the state, we find that the primary object of this 
form of thrift is to provide for dependents, for widows and 
orphans, who, but for such provision, in many instances, 
would become charges or wards of the state. By just so 
much as this is avoided, by just so much as women and 
children are made independent of such assistance, the revenue 
of the nation or of the state, is relieved, and can, therefore, be 
devoted, and is devoted, to the development of other interests 
affecting the public welfare. Considered from this point of view, 
it is clear that life insurance should not be an object of tax- 
ation, but rather to the contrary, as a means of diminishing 
public burdens, it should in all respects receive the generous 
consideration of the state. 

270 



the taxation of life insurance interests 

Insurance Taxation Contrary to Public Policy. 

The political or economic justification for a tax on life 
insurance is in harmony with the theory advanced by McCul- 
loch that "it is easily assessed and collected," but it is contrary 
to his conception of an equitable tax, in that it is not "at the 
same time conducive to public interests." More than a century 
ago the subject matter of life insurance taxation was carefully 
considered by Mr. Pitt in the framing of the English income tax 
bill in 1798, and it may not be out of place here to repeat 
the language then used, and which is as applicable to the point 
at issue as if it had been advanced to-day. Under the English 
income tax law of 1798 incomes were exempted from the payment 
of the tax to the extent of the premiums paid on life 
insurance. In defending this clause, Mr. Pitt said: "There 
is one case which, with a view to that class who are really 
willing to save for the benefit of others for whom they are 
bound to provide, makes some modification. It is in favor 
of those who have recourse to that easy, certain and advanta- 
geous mode of providing for their families by assuring their 
lives. In this bill, as in the assessed taxes, a deduction is 
allowed for what is paid on this account." This early recog- 
nition of the intimate relation between life insurance and public 
welfare is of more than passing significance. Life insurance 
in England was then in its very infancy, but even at that stage 
the good results likely to follow its universal extension had 
become manifest. It was brought out later, in the evidence 
submitted to a special committee on assurance associations in 
1853, that largely in consequence of this exemption from tax- 
ation, life insurance in England had made material advances, 
a portion of which at least was directly attributed to the relief 
from taxation. Of one office, the Equitable (London), it was 
stated in the evidence that, while during the ten years pre- 
ceding the passage of this act the increase in business had 
been but $4,500,000, the increase during the decade following the 
passage of the income tax law, relieving assurance associations 
from the payment of that tax, had been $20,000,000. The 
271 



THE TAXATION OF LIFE INSURANCE INTERESTS 

principle laid down in 1798 has practically remained the law 
of England to the present time. 

The principle of non-taxation of life insurance in England, 
as laid down by Mr. Pitt in 1798, has been frequently re-affirmed 
in the works of recognized authorities on economics and finance. 
A tax on insurance, according to Mill, as stated in his " Principles 
of Political Economy," "is a direct discouragement of pru- 
dence and forethought," and this view is practically accepted 
by McCulloch, who even more forcibly expressed himself to 
the point that a tax on insurance "discourages that providence 
and foresight, the encouragement of which ought to be an 
object with all prudent governments," and "seeing the vast 
importance of insurance, it may well be doubted whether it 
ought to be charged with any duty, however slight." With 
particular reference to taxation of insurance interests in this 
country, the subject was discussed in an able treatise thirty- 
four years ago by S. Morton Peto, according to whom "A tax 
on insurance is a tax not only upon industry, but upon prudence 
and frugality, and the American system seems to be far worse 
than that of which we have been so long complaining in Great 
Britain," and yet the conditions confronting insurance com- 
panies to-day are vastly more serious than they were under 
the war conditions of the early sixties. 

The Practice of Life Insurance Taxation. 

The method of life insurance taxation is a matter so in- 
volved and complicated by local conditions, varying with the 
different states, and even with the municipalities, in which 
the companies operate, that a critical discussion forms a subject 
by itself. It is the general practice of states to impose, 
first, the general property tax upon the real estate and personal 
property of the companies within reach of the tax assessor. 
This tax in 1909 formed about thirty per cent, of the total 
amount paid in taxes by a large and representative life 
insurance company. To this tax, provided it is properly 
assessed, there has never been any serious objection on 
272 



THE TAXATION OF LIFE INSURANCE INTERESTS 

the part of life insurance companies, the burden being con- 
sidered a proper one as a just contribution toward the 
general cost of state government.* By far the most important 
tax item, however, is the tax on premium income, which may 
vary from one to three per cent., according to the state in 
which a company transacts business. The tax on premiums 
is an unjust burden upon the business for the tax falls 
alike upon new premiums for risks just incurred and upon 
renewal premiums on risks assumed years ago. It can readily 
be seen that risks assumed years ago were calculated to 
produce a certain result on an assessment rate of mortality 
and interest. The imposition of taxes upon such payments 
must needs decrease the return to policyholders, and increase 
in consequence, the cost of insurance. If carried to the extreme, 
especially in the case of companies which issue only non- 
participating policies, such companies may ultimately be 
unable to meet in full their obligations in consequence of a 
policy on the part of the states which is as unwise as it is 
unnecessary. 

Taxes on Premiums. 

The practice of taxing premium receipts was ably discussed 
some years ago in an article in the New York Evening Post, 
and in part as follows: 

"It is a fundamental principle of social science that the 
insurance contract itself ought to be free from taxation. Tax- 
ation ought to be on property, on production. Insurance con- 
tracts produce nothing, t If any tax is imposed on insurance 
companies or insured persons as such, it should be imposed on 
their property and not on their contract. The taxation of 

* Probably the most important contribution to the technical con- 
sideration of the question of local taxation of life insurance companies 
is the brief filed by Richard V. Lindabury and Edward D. Dumeld, 
Counsel for Plaintiff in Error, the Prudential Insurance Company of 
America, in the case of the Mayor and Common Council of Newark, 
et al., vs. The State Board of Equalization of Taxes and The Prudential 
Insurance Company of America, 1910. 

t This question is discussed in Chapter II. 

273 



THE TAXATION OF LIFE INSURANCE INTERESTS 

premium receipts is utterly unscientific. It has no basis of 
credit in the ultimate distribution of the tax. The practical 
effect of it is seen by a calculation of what a policy of life insur- 
ance, running thirty or forty years, will amount to at the end 
of the term if the premiums actually paid are accumulated 
at compound interest, and what it will amount to in case the 
premiums before accumulation are diminished by, say a three 
per cent. tax. Anyone making such a calculation would be 
startled by the result. A tax of three per cent, on a premium, 
when it comes to a final settlement in the payment of policies, 
amounts to an enormous burden on the widows and orphans of 
deceased policy-holders, far beyond the tax levied on any other 
species of property in the community." 

Taxes on Surplus. 

So much as regards the taxation of the premium income. 
The third item of importance is the tax on surplus, which forms 
about thirteen per cent, of the total taxes paid at the present 
time in the case of a large and representative company. 
This tax is subject to the same criticism as the tax on 
premiums, in that it is both unscientific and unjust, being in 
fact in the direction of an impairment of the contract obli- 
gations of the companies which have agreed to pay a sum 
certain under conditions which did not presuppose the subse- 
quent imposition of heavy taxes. A company, by the inherent 
nature of the science of life contingencies, depends for the ful- 
fillment of its obligations, first, upon a normal mortality; second, 
upon the realization of an expected rate of interest on its invest- 
ment. The gradual decline in interest rates has made it neces- 
sary for most of the American companies to henceforth calculate 
their premiums on a three per cent, basis, and there has been in 
consequence an increase in premium rates during recent years. 
I doubt if this change in rates would have been necessary if the 
matter of state taxation had remained the comparatively unim- 
portant item it was, even as recently as ten years ago. This 
point was recognized as early as 1855, when in an article entitled, 
" Should Life Insurance Companies be Taxed," the Insurance 
Monitor of New York (p. 18) said: 
274 



THE TAXATION OF LIFE INSURANCE INTERESTS 

"The principle of insurance on lives supposes the average 
duration of life to be an ascertained fact, and that a given 
premium annually invested and compounded at a given rate of 
interest will produce the amount called for by the policy. 

"Whatever, therefore, disturbs the rate of accumulation 
must affect the result, and a company whose engagements 
require $100,000 to be annually invested at six per cent will 
at the end of the thirty-one years (the average duration of 
policies) show a deficiency of $1,000,000, in case its accumu- 
lations be taxed one per cent. Taxation is therefore fatal to 
the business of life insurance in this state." 

Stamp Taxes. 

The fourth item in direct taxation is now happily a matter 
of history only, that is, the internal revenue tax on new in- 
surance contracts, imposed under the war reventie act of 1898.* 
Under this law ordinary insurance contracts were charged a 
stamp tax of eighty cents per $1,000 of insurance, while indus- 
trial contracts were charged forty per cent, of the first weekly 
premium. This tax formed twenty-one per cent, of the total 
taxes paid by one large and representative company dur- 
ing the year 1899, and amounted to almost $100,000. A 
more unscientific and inequitable as well as unnecessary tax 
was never levied than this additional burden upon an interest 
already taxed beyond the point of sufferance. It was imposed 
upon the companies under the stress of war conditions, but 
even under conditions of peace the Senate submitted to its 
repeal only in conference committee. Those who are inter- 
ested in the subject and who may wish to trace the error which 
underlies nearly all the insurance taxation in this country, 
namely, complete ignorance of the nature of the business and 
the effect of taxes upon vested rights and obligations, should 
read the debates of Congress on the reduction of the war 
revenue tax, February 6, 1901. (Congressional Record, Vol. 
34, No. 47, p. 2194, et seq.) 

* For a discussion of the first stamp taxes upon insurance imposed 
by the U. S. Congress, see chapter IV, p. 190. 

275 



THE TAXATION OF LIFE INSURANCE INTERESTS 

Considering now the expenses for state supervision, licenses 
and fees, opinions differ as to whether these items should prop- 
erly be considered taxes in the true sense of the word. The 
direct burden of this tax is less than the indirect burden, since 
in consequence of the multiform system of state supervision the 
general expense rate of the companies has been materially in- 
creased on account of the larger clerical expense for the compila- 
tion of data not required for office purposes and of small value or 
interest to the general public. Few state commissioners remain 
long enough in office to gain sufficient personal experience to 
prove of real value to the insuring public, and they seldom possess 
actuarial or other insurance qualifications to make their recom- 
mendations useful. Hence the cost of state supervision and 
the implied office expense is in itself an item of considerable 
magnitude imposed upon the companies in addition to the taxes 
already referred to. 

The complications and diversities of state taxation may be 
further illustrated as follows : In the state of New Jersey life 
insurance companies pay first a tax of 0.35 per cent, on their 
total premium income, and in addition a tax of one per cent. 
on surplus. Now, in states which tax premiums collected 
within the state, an additional tax of from one to three per 
cent, may be collected, as, for instance, in the case of Kentucky, 
where the local state tax is two per cent, on gross premiums 
collected within the state. Thus the same premium income, 
already taxed once in New Jersey, is made subject to a 
second tax in the state of Kentucky, but in addition there 
is in force in that particular state a law under which the city 
of Louisville collects a further tax from life insurance com- 
panies equal to two and one-half per cent, of the premiums 
on new business collected in the city, imposing thus a third 
tax upon the same item of premium income. In Newport 
the same tax or two and one-half per cent, is collected, and 
in Covington one and one-half per cent. But this is not 
all, there have been paid in addition fees for state super- 
vision, valuation, filing of certificates, etc., and license fees 
276 



THE TAXATION OF LIFE INSURANCE INTERESTS 

for agents, all of which, of course, must come out of the 
premium income derived from local business, and all of 
which lie against the business transacted in the state of 
Kentucky as an expense. Even this is not all. After the 
various charges have been met and have been deducted from 
the premiums received there would be an additional tax on 
the remainder, if invested in local real estate, and under the 
war revenue act, there would have been an internal revenue 
tax of eighty cents per $1,000 of new insurance. Thus we 
have it that in this state, on a premium of say, $32.68, 
at age forty, for a whole life policy of $1,000, the company 
had to pay, first, eighty cents as the internal revenue tax; 
second, eleven cents as a local state tax in New Jersey; 
third, sixty-five cents as a local state tax in Kentucky; fourth, 
eighty-two cents as a local municipal tax in Louisville, Ky.: 
a total of $2.38, or equal to 7.3 per cent, of the premium paid! 

The Burden of Life Insurance Taxation. 

As has been stated, at the present time the life insurance 
companies of this country pay annually in excess of twelve 
million dollars for taxes, licenses and fees, a vast sum which, 
under normal conditions, would go toward a reduction in the 
cost of insurance or a reduction in premium rates, but which, 
to the contrary, have been increased in consequence of an un- 
wise and unwarranted policy on the part of states always ready 
to impose additional taxes upon an interest already overtaxed. 
On the basis of the annual premium income of all the companies 
in 1909, the taxes paid were equal to 2.15 per cent. If a com- 
parison is made with the year 1890 it appears that there has been 
a material increase, actual as well as relative, in the amount 
and proportion of taxes paid by the companies. In 1890 the 
companies paid $2,249,148 in taxes, equal to 1.42 per cent, of the 
premium income, against $12,126,470 in 1909, equal to 2.15 per 
cent, of the premium income. In other words, the companies 
in 1909 paid $4,100,000 in excess of what they would have paid 
had the tax rate of 1890 prevailed during the year 1909. 
277 



THE TAXATION OF LIFE INSURANCE INTERESTS 

A still more pertinent illustration of the burden of life 
insurance taxation is found in a comparison of the sums paid 
out in taxes with the sums paid out in dividends to the policy- 
holders. The term "dividends" in life insurance is misleading, 
but common usage has so adapted the term to the business 
that it is now difficult to invent a new one. As a rule, where 
the term "dividend" is used in life insurance transactions, 
the reference pertains to a sum of money which has originally 
been paid as a premium, but which subsequent experience 
proved not to be required. Such dividends accrue in con- 
sequence of a favorable mortality experience, of a lower ex- 
pense rate than was originally assumed necessary, and 
occasionally in consequence of a higher rate of interest earned 
than the expected rate. Such dividends, then, are not profits 
in the ordinary sense of the word, and this fact was early 
recognized by Mr. Joseph J. Lewis, internal revenue commis- 
sioner in 1863, who, in his report that year to the Secretary of 
the Treasury, made a strong plea for the repeal of the law 
taxing the dividends of life insurance companies.* How far 
the taxes paid by life insurance companies affect the dividend 
paying ability of the companies is made clear by the fact that 
to every $100 paid in dividends in 1909 there were $19.24 
paid in taxes. In other words, had there been no taxes upon 
life insurance interests, the returns to policyholders on partici- 
pating contracts could have been materially increased in the 
form of larger dividends, usually applied to a reduction of the 
premium, or for the purchase of additional insurance. 

Relation of Taxation to Cost of Insurance. 

Briefly summarized, the facts pertaining to the taxation 
of life insurance companies may be stated as follows: 

Out of every $100 received in premiums in 1909, $2.15 
was paid out in taxes. 

* Report of the Secretary of the Treasury, on the State of the Finances, 
p. 63. Washington, 1863. 

278 



THE TAXATION OF LIFE INSURANCE INTERESTS 

To every $100 paid to policy-holders in 1909, $3.36 was 
paid in taxation or license fees. 

To every $100 paid in death claims in 1909, $7.04 was 
paid in taxation or license fees. 

To every $100 paid in dividends to policy-holders, largely 
for the purpose of reducing the cost of insurance, $19.24 was 
paid in taxation or license fees. 

The percentage of taxation to premium income has in- 
creased from 1.42 in 1890 to 2.15 in 1909. 

The ratio of taxation to dividends to policy-holders has 
increased from 15.5 in 1890 to 19.24 in 1909. 

It is clearly indicated by these facts that the burden of 
taxation weighs, indeed, most heavily upon life insurance com- 
panies in the specific direction of efforts tending by economical 
management and careful selection to reduce the cost of insur- 
ance by dividends to policy-holders. Practically every dollar 
paid in taxation or license fees would naturally be returned 
to policy-holders as dividends, mostly used for the purpose of re- 
ducing the premiums. The increase which has taken place dur- 
ing the last twenty years in the ratio of taxes to premium 
income is still more clearly brought out in a comparison, or 
rather contrast, of the increase made by the companies in 
premium income with the increase in the total amount paid in 
taxation or license fees. During the period, 1890- 1909, the 
premium income of American insurance companies increased 
257.6 per cent, while the amounts paid in taxation or license 
fees increased at the rate of 439.2 per cent. In other words, 
to every one per cent, of gain in premium income or growth of 
the insurance business, there has been an increase of 1.7 per 
cent, in taxation, or burdens tending to materially hinder the 
greatest possible development of life insurance in this country. 

But perhaps the most serious aspect of the tax question is 
indicated in the comparison of tax payments with the interest 
earnings of the companies. With companies established for 
many years this matter is, perhaps, not of quite so much import- 
ance as it is to companies recently organized, or which are com- 

279 



THE TAXATION OF LIFE INSURANCE INTERESTS 

paratively new in the business of writing ordinary insurance. 
While the total income of all the American life insurance com- 
panies from interest and rents was $159,804,000, the taxes paid 
during 1909 were $12,126,470, representing 7.6 per cent. It has 
already become necessary for many companies to calculate 
their premiums on a three per cent, basis and an increase in 
premium rates has been made necessary because it is at present, 
and will probably be for many years, impossible to realize the 
high rates of interest obtainable in the past. 

The Incidence of Life Insurance Taxation. 

The incidence in general taxation has properly been called 
"the vexed question in finance," and, in the words of Mr. Mayo 
Smith, "Who really pays the tax? The person on whom it is 
levied or some other person upon whom the original sufferer 
can roll off the burden? " The answer to this question with 
particular reference to life insurance is that the incidence of 
life insurance taxation unquestionably falls upon the policy- 
holders, even though the company, as the representative or 
trustee of the policy-holders, pays the tax in the first instance. 
As has been said in an able article on the subject, which 
appeared in the Insurance Critic under date of December, 1909: 

" A tax on the company is really a tax on the policy-holders 
who form the company, and is paid only by them. This is 
obvious, if it is considered that a company has no other fund 
than the proceeds of the premiums paid by its policy-holders, 
and as the tax must be paid in out of this sole fund the conse- 
quence is that the cost of the insurance to the policy-holders is 
correspondingly increased. This may be demonstrated as fol- 
lows: The premium paid by the policy-holder is based on 
two things — the assumption of a rate of probable mortality, 
and the assumption of a probable rate of interest on that part 
of the premium which is the reserve, or laid aside, for the pay- 
ment of future losses. To this something is added as a pro- 
vision for expenses in conducting the business. These things 
cover the normal cost of insurance to the policy-holders. If the 
actual experience as to mortality, rate of interest or expense 
is more favorable than the assumption, whatever is left is sur- 

280 



THE TAXATION OF LIFE INSURANCE INTERESTS 

plus and is returned to the policy-holder as an over-payment, 
unless insured on the non-participating plan. Any tax paid by 
the company comes out of that surplus, if there is any. It 
makes the return to the policy-holder just so much less, and, 
consequently, makes the cost of his insurance just so much more." 

In a similar discussion the New York Evening Post of 
December 7, 1900, referring to the fact that the war tax on life 
insurance was paid by the policyholders of the company said : 

"Although this tax was nominally , paid by the insurance 
companies, it was in fact, paid by the policy-holders. This 
is an enormous tax on the frugal and provident men who wish 
to invest their savings in insurance policies for the benefit of 
their families when death shall deprive them of husband and 
father. It operates as a penalty on the prudence and thrift 
which alone seek this form of trust investment, and which, 
instead of being taxed with this oppressive burden, should bt 
as far as possible fostered and encouraged." 

The same point was also brought out in the congressional 
debates on the repeal of the war revenue act of 1898, when the 
chairman of the committee in charge of the bill said: "Then we 
go a step further and take the stamp tax off insurance policies. 
This latter tax is paid almost entirely by the man who receives 
the insurance. The man who provides for the future of his family 
in the event of his death by securing a life insurance or in pro- 
viding an indemnity for the family in case the home should burn 
down, was forced to pay this tax. Hence the repeal of a law 
which in the first instance should sever have been placed on 
the statute book, in plain recognition of the plea for simple 
justice that those who have voluntarily undergone privation 
and self-denial for the purpose of obtaining economic freedom 
for otherwise dependent survivors should not be taxed a second 
or a third time for the ulterior purposes of the state. A tax 
on life insurance, as thus paid by the policy-holders, is not a 
tax on their property, but on their losses, and no more justi- 
fiable than a tax on a house after it has burned to the ground. 
The hope for reform in life insurance taxation lies in the direc- 
tion of a true appreciation and clear comprehension of the 

281 



THE TAXATION OF LIFE INSURANCE INTERESTS 

incidence of the tax and the general recognition that this 
incidence cannot be and is not shifted from the policy-holder 
upon the shoulders of someone else more able to bear the burden. 
Hence the urgent plea that this subject of life insurance 
taxation should receive the most serious public consideration to 
the end that the present tendency to increase the already heavy 
tax burden of the companies be checked and a gradual decrease 
in the present tax rate be brought about. This plea is based 
on the fact that the annual taxes now exceeding twelve 
million dollars fall with undue severity upon a class of people 
than whom none is more deserving of the most generous con- 
sideration on the part of the state, a class of people who in 
the large majority of individual cases have undergone an almost 
inconceivable amount of self-denial for the sole purpose that 
those near and dear who are to live after them may live lives 
free from the taint of state aid or private charity. To tax this 
class of people, the policy-holders of life insurance companies, 
is, in the words of Charles Sumner, "A tax upon a tax," and 
in his emphatic language, "consequently, barbarism." "In- 
creased taxation," he said, "comes out of the thousands of 
policy-holders, and not from the companies' officers, as is often 
ignorantly assumed," and to this argument there is no answer 
save that the states need the money and that the life insurance 
companies can be conveniently made to pay it. 



282 



CHAPTER VII. 

THE TAX BURDEN ON LIFE INSURANCE POLICY- 
HOLDERS. 

Introduction. 
Life insurance companies are more heavily taxed than any 
other commercial interest and the rate of taxation is increasing 
more rapidly than the growth of the business, which itself 
has been little short of marvelous. For many years appeals 
have been made to legislative bodies to refrain from a further 
imposition of taxes, but the arguments and pleas have, as a rule, 
been ignored and treated with indifference and even contempt. 
The earlier conviction that life insurance should not be taxed 
at all, and which had been favored by the foremost of English 
and American statesmen, from Pitt and Peel to Daniel Webster, 
is now no longer tenable as a proposition in public finance 
and the day seems to have passed when considerations of public 
morality and social economy had weight in the deliberations 
of legislative assemblies, determined to find new sources of 
revenue to meet the results of extravagance in public expen- 
ditures. The state having the power to tax, the power has 
been abused until a point has been reached where it is proper 
to speak with entire truth of the tax plunder of life insurance 
policy-holders at the present time. And the end is not yet. 

The Burden of Insurance Taxes. 

For it is a plunder and nothing else, when the most pru- 
dent and unselfish class of citizens are compelled, through 
their insurance institutions, to pay a premium income tax, and 
other taxes, fees and licenses of more than twelve million dollars 
283 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

a year as a forced contribution to the revenues of states in which 
they may not reside and from the government of which they 
may not derive any benefit whatever. Life insurance com- 
panies or associations are not money-making institutions in 
the same sense as this term is used of banks, transportation 
companies, and mercantile undertakings generally, for while 
some are stock companies and others are mutual, and while 
still others combine both principles, it is an incontrovertible 
fact that they are not money-making institutions per se and 
that they have not been granted their charters for mere money- 
making purposes. The dividends which are declared and paid 
by stock life insurance companies are actually small in amount, 
practically uniform for a long period of years and they con- 
stitute but a relatively small item in the aggregate expenditures. 
The companies do not exist for the purpose of making money 
for stockholders, or to make profits for policy-holders, but 
they exist primarily and solely for the equitable distribution 
of losses which would otherwise fall with crushing force upon 
unfortunate individuals. There, however, are no objections 
to a tax upon stockholders' profits any more than there are 
valid objections to a reasonable tax upon the real and per- 
sonal property of the companies, required for the conduct of 
their business, but there are most serious objections against a 
substantial tax upon the premium income, or the gross or net 
income, as the case may be. Life insurance by its nature in- 
volves delicate and intricate calculations arising out of the 
science of life contingencies and the doctrine of compound 
interest, and the results anticipated may not be realized if an 
increasing rate of taxation deprives the companies of the normal 
earning power of money assumed in the original premium 
calculations. Since the premium is the basis of the contract, 
the amount of which itself is the contractual consideration, 
an increasing rate of taxation upon the premium income may 
impair the contract and to that extent make the ultimate 
fulfillment of all contractual obligations impossible. 
284 



tax burden on life insurance policyholders 

The Social Value of Insurance. 
Without making any special claim for life insurance as a 
social institution of considerable value to the state or the nation, 
it is generally held as an incontrovertible truth, sustained by 
the experience of every-day life, that life insurance is the only 
effective method of combining the value of systematic savings 
with the benefits resulting from the principle of association 
through which adequate protection is secured against inevitable 
losses which would otherwise fall heavily upon the individual 
and the state. The insured population, as a class, represent, 
therefore, a much more worthy and socially effective body 
of citizens than the uninsured, since the former are very much 
less liable to require state aid in poverty and support for widows, 
orphans and the aged. In proportion as society advances the 
social duty of providing against the financial consequences 
of the uncertainty of life through insurance becomes more 
generally recognized, until the duty of insurance has become 
accepted as a universal principle of right conduct in the relation 
of the individual to society throughout the civilized world. 

The Increase in Insurance Taxation. 
Over forty years ago this aspect of the business was clearly 
recognized by the late Elizur Wright, who, in the Massachusetts 
Insurance Report for 1867, and at a time when the tax upon 
life insurance was less than one per cent, of the premium in- 
come, said, "Life insurance deserves the fostering care of wise 
and liberal legislation. It should be freed from all unnecessary 
burdens. Government should as soon tax its asylums and hos- 
pitals as to seek a gain or revenue from the deposits which fore- 
sight and affection has set apart for the protection of thousands 
among the most helpless of its own citizens. A tax upon life 
insurance is nothing more than a tax upon widows and orphans." 
The suggestion, unhappily, was not heeded and the tax rate 
has gone up year after year until it has increased from 
seventy cents on every $100 of premium income in i860, to 
$1.23 in 1875, to $1-42 in 1890, and to $2.15 in 1909. The total 
285 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

sum paid in taxes, licenses, fees and for the cost of state super- 
vision in 1909 was $12,126,470. This sum was equivalent to 
1.62 per cent, of the gross income of the companies 
from all sources, or equivalent to a rate far in excess of the 
corresponding rate of taxation imposed upon commercial 
interests generally. No store, no bank, no transportation 
company, pays taxes upon its gross income, and it must be 
self-evident to even the least informed or most indifferent, 
that the amount thus exacted bears a definite and important 
relation to the cost of the insurance sold. It requires no ex- 
tended argument to prove that in the nature of the business 
and by long-established practice and usage, the money thus 
exacted in the form of taxes would otherwise have been re- 
turned to the policy-holders, or would have accrued to their 
benefit in some form or other, for the object and sole purpose 
of reducing the cost of insurance. It is little short of a pre- 
posterous farce for legislators to attack the companies for 
extravagance, or for failure to reduce expenses, when a con- 
stantly increasing tax burden is placed upon the companies, 
greater than any sum which could be saved by the most 
rigid economy in the expenses of agency or office administration. 

Life Insurance Not for Profit. 

It will be argued, in defence of the present system, that 
life insurance ought to contribute its share to state revenue, 
like any other industry or commercial undertaking, but life 
insurance is totally different from commercial enterprises gener- 
ally, in its objects and aims, as well as in its fundamental, 
theoretical and practical assumption. It does not exist, and the 
companies have not been formed, for profit-making purposes, 
and life insurance is not for gain, but for the distribution of 
losses, having for its object the protection of the family or 
the individual against the financial consequences arising out 
of the uncertainties of life. By its nature, the premium (so- 
called) cannot be the exact equivalent of the ultimate cost, 
in consequence of which a re-distribution is made from time 
286 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

to time, in the case of participating policies in the form of 
dividends, and in the case of non-participating policies in the 
form of voluntary concessions. This return is not a profit, 
but evidence of an over-charge, determined by subsequent 
experience and arising out of a more favorable mortality ex- 
perience, or a higher rate of interest earnings, or of a lower rate 
of general expenses than was expected. Over-charge may be 
technically called surplus, but it is not surplus or profit in the 
commercial sense of the term, and to tax this over-charge is to 
take an unjust advantage of the most thrifty element of the popu- 
lation and to hinder materially, by increasing the cost, the 
largest possible progress of this form of social protection. 
To, therefore, tax the premium income is to tax the policy- 
holder unjustly and every injustice in taxation reacts in time 
disastrously upon the progress of society itself. 

The Menace of a Tax upon Reserves. 

Still more of a menace to the future security of the com- 
panies is the proposal that a tax should be imposed upon re- 
serves, so-called, which constitute the fund set aside in com- 
pliance with law for the future discharge of contractual obli- 
gations. How that fund must be accumulated, how it must 
be invested, how it must be conserved, is all a matter of statu- 
tory requirement and not a dollar can be improperly diverted 
therefrom except through the taxing power of the government. 
To impose a tax upon this fund of three-quarters per cent., 
as has been proposed by the Governor of Wisconsin, would 
be to imperil and to imperil with certainty the future of life 
insurance companies and their ability to carry out their con- 
tractual obligations with their policy-holders. 

The Need of Tax Reform. 

There is so much to be said upon this subject that, regard- 
less of the fact that life insurance taxation has a literature 
of its own, much, if not most, of the work to bring about the 
necessary reforms remains to be done. Year after year earnest 

287 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

and able appeals have been made by authorities on life insur- 
ance taxation, but little heed has been given to their pleas 
for equity and justice in behalf of the policy-holders' interests. 
In 1908 the whole subject was ably discussed before the 
Association of Life Insurance Presidents, including contributions 
by Prof. Zartman, of Yale, President Dry den, of The Prudential, 
and Samuel B. Smith, of the Volunteer State Life, and a reso- 
lution was adopted urging life insurance companies to interest 
their policy-holders, as far as practicable, and to enlist their 
co-operation in a determined opposition towards a further 
increase in the tax rate and efforts to bring about a reduction 
in the rate. President Dry den argued in behalf of a uniform 
rate of one per cent, of the premium income, which, if adopted 
throughout the country, would save the policy-holders over 
five million dollars per annum. He called attention to the very 
much lower rate in certain European countries, and in par- 
ticular in Germany, where the rate is only one-eighth of what 
is paid by life insurance companies in America. In concluding 
an able and comprehensive argument, Mr. Dry den said: 

Life Insurance Taxation in Germany. 

"If the German Empire, with its vast burden of military, 
colonial and other expenditures far in excess of ours, refrains 
from taxing its life insurance policy-holders more than a quarter 
of one per cent, of the premium income, there can be no eco- 
nomic or political justification for imposing a tax of two per 
cent, (eight times as much) upon the premium income of Amer- 
ican life insurance companies. If the great state of New York, 
with its numerous state and municipal expenditures of all kinds, 
refrains from taxing life insurance companies more than one 
per cent, of the gross premium income, I insist that there is 
no corresponding justification on the part of other states to 
tax life insurance companies at a higher rate." 

Some Results of Public Education. 

Some good, no doubt, has followed this appeal to the 
public and strength has been given to the movement for or- 
ganized opposition towards a further increase in the rate. 
288 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

As stated by Mr. Robert Lynn Cox, the General Counsel of 
the Association of Life Insurance Presidents, 

11 In seven States, therefore, it has been proposed this year 
(1908) to increase the tax burdens of policy-holders largely because 
it seemed to be an easy and effective way to raise revenue 
with little protest from those who pay the tax. It is pleasing 
to note in this connection that while bills were proposed that 
would have added in the aggregate by way of taxes at least 
$275,000 annually to the expenses of the business, and there- 
fore to the cost of life insurance, the actual increase from the 
legislation of the year will amount to less than $25,000 per 
year. Even this increase will be offset in part by slight reduc- 
tion of rates in two States. We believe that this favorable 
showing is largely the result of our efforts to prove to legisla- 
tors that the taxes imposed upon life insurance increase the 
cost, thereby discouraging a business which it is the duty of 
the State to encourage and protect. The subject of taxation 
cannot, however, be dismissed from our mind when we consider 
the fact that at least a dozen States are facing large deficien- 
cies in necessary revenue, and that under laws of recent enact- 
ment commissions will be required to consider the revision and 
readjustment of the tax laws in a dozen States within the next 
eighteen months. That the interests of policy-holders as a class 
must be represented before these commissions is manifest when 
we consider that they owe their existence to the needs of several 
States for additional revenue, and the individual who most 
generally does not know that he is being taxed, or, knowing, 
has no real opportunity to oppose, furnishes a most attractive 
mark for those who are seeking increased revenues." 

Federal Corporation Tax on Insurance. 

While some of the states have refrained from imposing 
further taxes, the federal government itself, through the sanc- 
tion of congress, has, for the first time in its history imposed 
a tax upon the net income of legal reserve life insurance com- 
panies, including such companies in the same class as commercial 
undertakings generally, organized and carried on for profit. 
Stamp taxes have been imposed on two previous occasions, 
first, during the Civil War, and second, during the Spanish- 
289 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

American War — but they were war taxes and, perhaps, as such 
justifiable, in view of the urgent need for additional revenue. 
But for the federal government to impose a tax upon the net 
income of life insurance companies during a time of profound 
peace and plenty, is but another evidence that most of what 
has thus far been done to oppose unjust taxation has been of 
no avail. If the tax imposed is really for revenue-raising pur- 
poses, the Ways and Means Committee could easily have found 
other sources from which to derive the necessary amount which 
may be required for the needs of the government. If the tax 
has been imposed for other purposes than revenue, it is con- 
trary to our theory of government, which does not give to the 
federal government the right and the power to achieve that by 
indirection which it is specifically excluded from achieving 
by direct enactments. If the object of the taxing of life insur- 
ance companies is the same as it is alleged to be in the case of 
other corporations, and that is, to secure to the federal govern- 
ment power and control over these corporations, through the 
medium of taxation, then the federal government will secure 
the right and the power of federal insurance supervision, which 
has been so strenuously denied to be within the meaning of 
the commerce clause of the Constitution — but whatever may 
be the object, whether for revenue or for control, the tax is 
contrary to the interests of the policy-holders, a hindrance to 
the business, and a menace to the future, with the ever-present 
possibility that in addition to heavy state taxation, it may 
ultimately cause the companies to default in their obligations. 
Taxation in any form is but another word for state inter- 
ference with industry, and state interference is practically 
equivalent to state supervision and control. If the United 
States Congress has not the power to supervise and regulate 
insurance companies, it would seem to be a gross abuse of the 
taxing power of the Constitution to use it to attain an end which 
is otherwise held to be unconstitutional. 
290 



tax burden on life insurance policyholders 

Taxation Should be for Revenue Only. 
There can be no more sound principle in political economy 
and political science than that all taxes should be for revenue 
only and not for a hidden or ulterior purpose. That is not 
honest legislation (however honest the intent) which attempts 
to destroy, regulate or change by taxation and thus accomplish 
what cannot be attained otherwise. Congress might have imposed 
a prohibitory tax upon lottery tickets, but Congress preferred to 
achieve the end sought by prohibiting the lottery companies the 
use of the mails. In the words of the foremost American authority 
on the theory, and practice of taxation, the late Mr. David 
A. Wells: "To seek to make taxation, which is a fit contrivance 
only for raising revenue an instrument for effecting some 
ulterior purpose, be it never so just and legitimate, to seek to 
use it for the attainment of any other object than the obvious 
one .of raising money, is to lose sight of the fundamental 
principle of every free government and to forbid all expectation 
of recognizing any other basis for the exercise of this great 
sovereign power of the state, than expediency, which in turn 
will depend upon the actions, passions and prejudices of 
legislators who may not be the same in any two successive 
legislative assemblies." The same conclusion is advanced by 
Cooley, the foremost American authority on the law of taxation, 
in the statement that "A burden not laid for the purpose of 
producing revenue, but in order to accomplish some ulterior 
object, which the general government lacks the power otherwise 
to accomplish, comes under no definition of the word 'tax' which 
is recognized in public law." These objections are fundamental 
and they require to be brought home to every American citizen 
who desires the continuance of our form of government as it 
was established by the fathers and designed by the wisdom of 
true statesmen of another day. 

Moral Aspects of Life Insurance Taxation. 
There is another point of view from which this question 
may be considered and that is the morality of exacting a tax 

291 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

from the contributions of the most economical, thrifty and 
self-sacrificing of citizens, for the furtherance of more or less ill- 
reasoned projects of prodigal governmental expenditures. It 
would be much better and more conducive to the public interest 
if the federal and state legislatures would concern themselves 
with proposals for retrenchment and economy rather than to 
encourage extravagance in the use of public funds. It ap- 
pears to be an accepted axiom of governmental policy that the 
rule which applies to every citizen, not to spend more than 
his income, does not apply to government and that enormous 
burdens may be imposed upon subsequent generations in the 
furtherance of state or national projects, many if not most of 
which, involve a waste of public money rather than the achieve- 
ment of any beneficial results.* Wells, quoting from Sharwood's 
Legal Ethics, properly observes with reference to this point, that 
"One grievous invasion of property — and, of course, ultimately 
of labor, from whose accumulations all property grows — is by 
government itself, in the shape of taxation for objects not 
necessary for the common defense and general welfare. Men 
have the right not only to be well governed but to be cheaply 
governed — as cheaply as is consistent with the due mainte- 
nance of that security for which society was formed and govern- 
ment instituted." And to this Wells adds the well-known 
words of President Cleveland in his Message of December, 1888. 
"To the extent that the mass of our citizens are inordi- 
nately burdened beyond any useful public purpose and for 
the benefit of a favored few, the government under pretext 
of an exercise of its taxing powers enters gratuitously into 
partnership with these favorites to their advantage and to the 
misery of a vast majority of our people."! 

*I may also quote the words of Mr. G. Cassel from his treatise on 
the "Nature and Necessity of Interest," "that the world is not so rich 
that every demand can be satisfied." (p. 72). 

fThe Theory and Practice of Taxation, by D. A. Wells, p. 250. 

292 



tax burden on life insurance policyholders 

Constitutional Aspects of the Tax Problem. 
It is not the present purpose to discuss the question whether 
the Federal Corporation Tax was proposed primarily for reve- 
nue-raising purposes, or for the vastly more important 
object of federal government supervision and control. The 
constitutionality of the tax will, unquestionably, be settled 
by the Court of last appeal, and while the same conclusion 
may be advanced as in Gibbons vs. Ogden, that "Congress 
is not empowered to tax for those purposes which are in the 
exclusive province of the state," it is also well to recall that 
the Supreme Court has held that the judicial power cannot 
inquire into the intentions of Congress in imposing a tax; and 
that if injustice is done the only remedy is in appeal to the 
legislative power that has inflicted it. But it is nevertheless 
equally probable that the Supreme Court will take cognizance 
of the general state of the public mind and the public conviction, 
that the Corporation Tax was not enacted primarily for revenue- 
raising purposes, but chiefly and perhaps solely to obtain for 
the federal government the right and power to control and 
supervise state chartered corporations. 

The Power to Tax Is the Power to Destroy. 
The federal constitution, as interpreted by the Supreme 
Court, prohibits the state from taxing the agencies and instru- 
mentalities of the federal government, and by a like inference, 
according to Wells, and other authorities on taxation, "The 
federal government cannot tax state instrumentalities or 
agencies," and among these there are not any more important 
than state chartered corporations. If the federal government 
can rightfully impose a tax of one per cent upon the net income 
of such corporations, it can impose any other tax it may deem 
necessary to accomplish its purposes, and among these purposes 
in course of time may be the desire to destroy. If the federal 
government can rightfully impose a ten per cent, tax upon the 
circulation of state banks and destroy state institutions as state 
banks of issue, it can in its discretion destroy, by the imposition 

293 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

of a prohibitory tax, all state chartered corporations, and among 
these state chartered insurance companies. The principle has 
been laid down by the Supreme Court in the case of Weston 
vs. the City of Charleston, that "If the right to impose a tax 
exists, it is a right which in its nature acknowledges no limits." 

The Inequalities of Life Insurance Taxation. 

Aside from constitutional objections, there are, however, 
specific reasons why the federal government should not have 
imposed this additional tax burden upon life insurance policy- 
holders. The total amount of revenue to be raised through 
the tax could have been obtained with equal facility through 
any one of the many stamp taxes imposed during the Spanish- 
American War. The tax mentioned certainly violates one of 
the canons of equitable taxation, as denned by Sismondi, the 
economist, that "Taxes should never touch what is necessary 
for the existence of the contributor." Life insurance, under 
modern conditions, is an absolute necessity for maintaining 
the American standard of life and social security, and in exact 
proportion as taxes diminish the returns to policy-holders, the 
cost of insurance is increased and to that extent the largest 
development of the business is prevented. The human mind 
is so constituted that even an apparently slight difference in 
price will affect the purchase, and every possible reduction 
which can be made in the cost of insurance extends the sphere 
of life insurance operation. 

The Facts of Over-taxation. 

The facts of over-taxation in life insurance are, in brief, 
as follows: The 189 legal reserve life insurance companies 
transacting business in the United States in 1909 had a total 
income of $748,027,892, and a premium income of $565,228,893, 
insuring $15,480,721,211 of family and individual protection. 
The companies during the same year paid $12,126,470 in taxes, 
licenses, fees, and the cost of state supervision, equivalent to 
1.62 per cent, of the total income and 2.15 per cent, of the pre- 

294 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

mium income. This enormous sum is a heavier burden of tax- 
ation than the corresponding burden placed upon any other 
large financial or commercial interest. In its final analysis 
every dollar of taxation is paid b)^ the policy-holders and every 
dollar represents diminished utility of the true and ultimate 
value of insurance. 

Taxes Paid by Policyholders and Beneficiaries. 

A brief comparison of the actual facts of insurance expe- 
rience will very clearly emphasize the truth and importance 
of the foregoing assertion. In 1909 the total amount paid in 
death claims to insurance policy-holders was $172,280,388. Had 
there been no taxes or fees of any kind, the beneficiaries could 
have received $7.04 more for every $100 actually received in 
the form of claim payments. Or, to consider the subject from 
another point of view, during the same year there was paid 
out to life insurance policy-holders $63,040,725 in dividends, 
so-called, including what is technically a temporary over- 
charge and, in fact, a return of that over-charge plus the interest 
accumulations for the time during which the return has been 
withheld. If there had been no taxes of any kind upon 
insurance, the policy-holders could have received $19.24 more 
for every $100 actually received in dividends or concessions, 
and by just so much the true cost of insurance would have 
been reduced and the utility of this method of family protection 
would have been correspondingly enhanced. 

The Insurance Tax Ratio in Germany. 

The fifty-nine German life insurance companies in 1907 
received in premiums M. 498,434,000, and they paid out in 
taxes and fees of all kinds the sum of M. 1,222,000, or .245 per 
cent, of the premium income, against 2.15 per cent, paid out 
during 1909 by life insurance companies in the United States. 
Had the American companies been taxed at the same rate in 
proportion to their premium income, they would have saved to 
their policy-holders $10,741,659 during 1909 and $86,269,041 

*95 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

during the past ten years. The same fifty-nine German life 
companies had a total income during 1907 of M. 656,606,000 of 
which the amount paid in taxes and fees for government super- 
vision was 0.186 per cent. In contrast, the American companies 
during 1909 paid 1.62 per cent, of their total income in taxes, 
so that if they had paid taxes in proportion to the total 
income by the German standard, they would have saved to 
their policy-holders the sum of $10,735,138 during 1909 and 
of $86,756,708 during the prior ten years. 

The Insurance Tax Ratio in Canada. 

The burden of life insurance taxation in Canada is also 
much less than in the United States — in fact, less than one- 
half the average rate in proportion to the premium income. 
Twelve of the principal Canadian companies, with a premium 
income during 1907 of $18,801,814, paid out in taxes, licenses, 
fees, and cost of supervision, $200,062, or at the rate of 1.06 
per cent . Had the premium income of American life insurance 
companies during 1909 been taxed in this proportion, the total 
amount saved to American life insurance policy-holders would 
have been $6,135,044 during the year, or $47,796,987 during 
the last decade. 

The Insurance Tax Ratio in Australia. 
Mention may also be made of the fact that the insurance 
tax ratio in Australia is much less than in the United States. 
The foremost Australian company, the Mutual Provident in, 
1907 had a total premuim income of £2,061,067 sterling, of 
which it paid £28,736 in taxes of all kinds, or at the rate of 
I -394%- Had the American companies in 1909 been taxed 
at this rate, they would have saved to their policy-holders the 
sum of $4,247,179. 

Income Tax Reductions on Account of Life Insurance. 

In England and in some other foreign countries, deductions 
are permitted to be made from assessments for income tax to 
296 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

the amount paid in life insurance premiums, but in England, 
for illustration, this amount must not exceed one-sixth of the 
net income liable to tax. In 1906-07 the amount of income 
allowed to be deducted on account of life insurance premiums 
amounted to £9,155,000, which at the average rate of is. in 
the pound, would have produced £457,750 of additional revenue. 
The amount thus freed from income tax was within two million 
pounds of the amount exempted in the same manner in the case 
of charities, hospitals, and Friendly Societies. As a further illus- 
tration of the importance of this concession to life insurance 
policy-holders in England, it may be stated that in the five 
years ending with 1908, over £100,000 was returned to the 
taxpayers on account of over-payments made in ignorance of 
this salutory provision of the law. 

European Methods of Insurance Taxation. 

The foregoing illustrations, derived entirely from official 
sources prove conclusively that other great nations have re- 
frained from taxing life insurance as it is taxed in the United 
States at the present time. The Commissioner of Insurance 
of Texas was, therefore, in error when he made the state- 
ment that "There is no apparent reason for concluding that 
the average amount of taxation levied in European coun- 
tries, directly or indirectly, in one form and another upon 
the life insurance business is less than the average tax levied 
in the United States." If the Commissioner had examined the 
revenue accounts of any single German life insurance company, 
he could easily have ascertained that the tax rate is very con- 
siderably less than it is in America. The total amount paid 
in taxes of all kinds by German life insurance companies was 
0.245 P er cent, compared with 2.15 per cent, of the premium 
income paid by American life insurance companies in 1909.* 
It is quite true that there are certain documentary stamp 
taxes required to be paid in various German states, as well 

♦That is to say, for every 24c paid in taxes by German Life Ins. Cos., 

Amer. Cos. pay $2.15. 

297 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

as in other continental states and in England, but these are 
small in amount, they are paid directly by the policy-holder, 
and they are compensated for, in a large measure, by the income 
tax exemptions, such as are permitted to be made on account 
of life insurance premiums paid in England and certain other 
European states. It is not, however, so much a question of 
the method of taxation as of the tax burden itself, and no 
German life insurance company at the present time pays directly 
or indirectly in taxes what is paid by American life insurance 
companies. In Italy and some other countries the tax rate 
is high, and the progress of the business has been very slow, 
as a result of the heavy taxes imposed. But in the greatest 
of the continental states, that is, Germany, where the Imperial 
government is most heavily pressed for new sources of revenue, 
where new taxes have been imposed upon a large variety of 
interests and instrumentalities of commerce, including taxes 
on railway tickets, taxes on advertisements, taxes on gas and 
electricity, and increased taxes on tobacco, no additional bur- 
dens have been imposed upon life insurance, and, in fact, through- 
out the extended Parliamentary debates no one has proposed 
that the necessary revenue should be derived from the spoliation 
of the trust funds of life insurance policy-holders. 

Gross Inequality of Life Insurance Taxes. 

Granting, however, for the sake of argument, the expediency 
of life insurance taxation, it remains to be proven whether or not 
the tax on premiums is equitably assessedupon the different classes 
of policy-holders. It is an accepted rule in law that "While 
perfect equality is unattainable, only the statutes based upon 
false and unjust principles, or producing gross inequality will 
justify the interposition of the courts." It requires no extended 
analysis of the facts in the case to prove that a substantial tax 
upon premiums is productive of gross injustice in the case of 
one class of policy-holders as compared or contrasted with 
another. In the nature of life insurance, the premium is the 
basis of the contractual relations between the insured and the 
298 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

company, and out of the premium arise all the subsequent 
results to the insured, favorable or unfavorable, as the case may 
be. If the premium is insufficient, the contract cannot be 
carried into effect, and it is on this ground more than on any 
other that legal reserve life insurance is so immeasurably superior 
to fraternal or so-called insurance on the assessment plan. 
Since the premium is conditioned by the age of the insured 
and the subsequent after duration of life, the premium is neces- 
sarily lowest in youth and highest in old age. That is to say, 
to obtain the same amount of insurance, a person of advanced 
years has to pay much more than a person of younger years. 
For illustration, a Whole Life Non-Participating $1,000 Policy 
costs $14.96 at age twenty and $38.83 at age fifty. Now, a 
premium tax of two per cent is equivalent to thirty cents per 
$1,000 of insurance at age twenty, and to seventy-eight cents 
at age fifty. If that is not gross inequality and unjustifiable 
discrimination in taxation, it will be difficult to establish that 
contention in a more satisfactory manner. 

The Insurance Tax Burden on the Aged. 

The importance of this consideration of equality and 
justice suggests a somewhat more extended consideration 
of this point. A policy taken out at age twenty on the Twenty 
Payment Life Non-Participating plan will cost annually $22.60 
per $1,000, or forty-five cents in taxes, when the rate is assumed 
to be two per cent. In twenty years the insured will, therefore, 
pay $9.00 in taxes, exclusive of the compound interest accu- 
mulation on the amount paid, if available for savings or invest- 
ment. The same amount of insurance on the Twenty Payment 
Life plan at age fifty will cost $44.99, and the average annual 
amount paid in taxes will be ninety cents, or $18.00 during the 
twenty years of policy continuance. It is, therefore, self- 
evident that the man at fifty pays exactly twice as much in 
taxes as the man at twenty, although the latter is in a much 
better position to pay the tax than the former. The disparity 
in the tax burden would naturally be still greater at higher ages. 
299 



tax burden on life insurance policyholders 

Tax Reduction a Necessity. 
It is not necessary here to consider other evidences of ine- 
quitable taxation, the conflict of state laws affecting life insurance 
policy-holders in different states, the evil results of retaliatory 
legislation, and the inequality of burdens upon different classes 
of policy-holders, paying the same premium but not the same 
tax. Evidently, uniformity is most to be desired, but next 
to uniformity, there should be permanency, and next to per- 
manency there should be reduction to a maximum of not more 
than one per cent. This is the rate which was conceded to be 
fair and equitable by President Dryden in his address before 
the Association of Life Insurance Presidents, and this principle 
may be said to conform to the sentiment and views of the 
majority of Insurance Commissioners, who have given this 
subject careful and deliberate attention. At the National Con- 
vention of Insurance Commissioners, in 1909, the President 
of the Association, the late Mr. Benjamin F. Crouse, Insur- 
ance Commissioner of Maryland, after referring to the very 
exhaustive and strong report made by a Special Committee 
of the convention at the previous meeting, recommending 
conservatism in matters of taxation and a reduction in the 
tax rate, said, "I think that we should not fail to re-emphasize 
the main features of that report and thus demonstrate that 
we propose to stand firmly in favor of a reduction of what 
we believe to be excessive taxation on those who by their 
industry, thrift and frugality are creating a fund for old age or 
in the event of death to provide for those whose support is gone. 
The insurance business should undoubtedly bear its fair and 
proper share of governmental expenses, but should not be bur- 
dened with heavy and excessive taxes simply because it can be 
done by hiding and covering them up in the premiums paid by 
policy-holders or by reducing dividends which otherwise would be 
largely increased. I know how difficult it is to get legislatures 
to surrender a source of large revenue, such as the insurance 
business, especially when the expenses of government are 
greater than the income ; but if the people who do the voting 
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TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

are clearly convinced that those who pay insurance premiums 
are paying excessive taxation on their savings, some relief 
will undoubtedly come." 

Public Interest in Life Insurance Taxation. 
The time will come, undoubtedly, when policy-holders will 
realize and understand that they alone are paying the taxes 
imposed upon life insurance companies out of their premiums 
and that the ultimate cost of insurance is increased in prac- 
tically exact proportion to the increase in the tax rate. 
They will understand and better appreciate the tremendously 
suggestive fact that since 1865 over $160,000,000 has been paid 
by life insurance policy-holders in taxation of every kind, in- 
cluding licenses, fees, and the cost of state supervision. They 
will protest against double taxation, they will object to the 
state making insurance dear, while the companies by every 
means in their power are determined to reduce the cost to the 
lowest possible basis, and having come to an understanding 
and a realization of the facts, the policy-holders, as voters 
under our representative form of government, will not fail to 
make themselves heard and see to it that their objections re- 
ceive respectful consideration. 

Life Insurance Taxation without Representation. 

Every state which imposes a tax upon the total premium 
income of the life insurance companies, or associations tran- 
sacting business therein, violates one of the first canons of 
equitable taxation, which is comprehended in the brief state- 
ment that "The sphere of taxation should be limited to 
persons, property and business exclusively within the political 
jurisdiction of the taxing power." As the taxes are now imposed 
in some of the states, the policy holders throughout the country 
pay their contribution prorata towards the support of state 
governments in which they themselves have no interest and in 
which they have no advantage. That is certainly taxation with- 
out representation, and, as such, contrary to the fundamental 
301 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

conception of American liberty. Such taxation violates the 
economic axiom that "No tax should be imposed by a state 
or government, except by the consent of the people by whom 
it is to be collected, either directly or by their authorized repre- 
sentative in Congress, Legislature, or Parliament, assembled.'' 
And such taxes imposed under whatever circumstances, in 
whatever manner, or for whatever reason, or by whatever 
taxing authority, are contrary to our accepted principles of 
political justice, and they should be resisted by all proper 
means as a menace to the future of our political institutions. 

Injustice of Insurance Franchise Taxes. 

It is equally unjust and in violation of the canons of equity 
in matters of taxation that a state should impose a heavy so- 
called franchise tax, which is but another term for exacting 
large amounts from the companies for which no equivalent 
benefit is rendered. In the every-day interpretation of the term 
"franchise" there is implied a special concession, a special 
privilege, or a special advantage, such as the right of eminent 
domain given to transportation companies, or the right of a 
semi-monopoly given to public service corporations, but no such 
rights and privileges are given to life insurance companies in 
the granting of their charters. Professor E. R. A. Seligman 
has defined general corporation franchises as "the mere privilege 
to act as a corporation," that is,the right to live or to exist as a 
corporation, and for any state to impose in return for this right 
a so-called franchise tax of one per cent, or of an average 
of 1.62 per cent, of the gross income, is a grave abuse of the 
taxing power and a serious injustice to the most thrifty and 
unselfish portion of citizenship. While a state, no doubt, has 
the right to impose any condition it may see fit as a condition 
precedent to the granting of a life insurance charter, the state 
has no moral right at least to subsequently impose burdens 
which may make it impossible for the corporations to carry 
out all their contract obligations. 
302 



■ 



tax burden on life insurance policyholders 

Ethics of Life Insurance Taxation. 
But a premium income tax conflicts otherwise with the 
canons of equitable taxation, in view of the accepted principle 
in all taxation, that ''The tax must above all possess the 
requisites of legality, of certainty, of legitimacy, or equality, 
and of morality. " Granting, for the sake of argument, that 
the federal corporation tax upon insurance, and the state 
taxes upon the premium income, conform to the first four of 
these qualities, they certainly do not meet the last, or the 
requisite of morality. Every premium paid on account of life 
insurance is already a self-imposed form of taxation, primarily 
and chiefly for the benefit of others, and indirectly a contri- 
bution to the welfare of the state. Life insurance premiums 
are voluntary deductions from the family budget, which among 
the improvident, the reckless, the indifferent and the profligate 
are expended for drink, for tobacco, for amusement or luxuries, 
in disregard of every principle of economy. 

A Tax Burden upon Losses and Calamities. 

But if the principle of life insurance taxation is sound, 
why does not the state impose a direct tax upon the payments 
to policy-holders, which could be made to produce the same 
amount which is now exacted, but which in that case would be 
clearly apparent and readily within the understanding of the 
insured. Such a tax could be made progressive, so that the 
claims for small amounts might be exempt and the claims for 
large amounts be taxed in proportion to the wealth of the 
beneficiary. To raise the amount paid in taxes and for the 
cost of supervision during 1909, amounting to $12,126,470, 
by a direct tax on death claims would amount to 7.04% of such 
claims paid in 1909. If such a tax were imposed, the policy- 
holder would know and know whom to hold responsible for a 
tax burden upon losses which is without a corresponding instance 
in the whole history of taxation- It seems appropriate to include 
here the sarcastic comment of the New York Sun, many years 

303 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

ago, when the tax burden was very much less indeed than it is 
at the present time: 

Early Objections to Insurance Taxation. 

"Iowa and Pennsylvania make life and death alike pay 
tribute to Caesar, and impose a toll on the entrance to the 
graveyard and a transit fee upon the avenue which leads to 
the 'place of skulls.' They will do better to erase from their 
statute books a law so contrary to public policy, so hostile to 
prudent provision for widowhood and orphanage. It does not 
strike at the life insurance companies, but rebounds upon the 
beneficiaries and their provision. If they will persist in the 
collection, we will offer a hint for their Committee on Ways 
and Means. When the body of the departed is composed in 
its shroud, let the coin upon the closed eyelids escheat to the 
State and swell the current revenues of the treasury; and if 
a specific officer is created for the duty, he may be designated 
as the Collector of Pennies from Dead Men's Eyes." 

No Objection to Rational Taxation. 

No one who has ever written with authority on the sub- 
ject of insurance taxation has objected to the proper tax- 
ation of the real property held by insurance companies, and in 
1909 the American companies paid taxes for this purpose to 
the amount of $2,328,229, or 19.2 per cent, of the whole sum 
paid out in taxes. The remainder of the taxes, amounting 
to $9,798,241, was paid upon premiums, reserves, surplus, etc., 
or as license fees for agents and the direct cost of state super- 
vision and examination. It is difficult to explain why so useful 
a person as an insurance agent should pay a license tax to 
carry on his trade, when a minister, a doctor, or a social worker 
in a settlement, is not required to pay a similar tax, to work 
for the amelioration of human distress in the same direction, 
and, broadly speaking, primarily for the same purpose of self- 
support. There is no more charity in the work of a doctor, or 
a settlement worker, than in the work of a life insurance agent , 
and to tax the latter and not the former is unjust and rank 
discrimination. 

304 



tax burden on life insurance policyholders 

Unjust Discrimination Against Life Insurance Policy- 
holders. 

If the premium payments of life insurance policy-holders 
may be taxed to the extent of more than two per cent., why 
should it not be equally just and fair to impose a corres- 
ponding tax upon the receipts of hospitals, funds for foreign 
missions, churches, charities, settlements, etc. But, granting 
that these agencies fall within a narrower definition of the term 
"charities," there certainly is no fundamental difference in the 
amounts deposited in savings banks, which are exempt from 
taxation in most of the states, and upon the annual deposits 
of which no Legislature would dare to impose an annual tax of 
two per cent and more. To a considerable extent the savings 
function in life insurance performs the same purpose as in 
savings banks proper, being subject to the operation of the 
principle of compound interest, and whatever is taken from 
one should, with equal justice, be taken from the other. 

An Abuse of State Power. 

And here it may be asked, by what right does the state tax 
life insurance premiums and divert to other uses the sums 
contributed for a specific purpose, chiefly a purpose coincid- 
ing with the aims and ends of government itself? A state 
has not the right to impose inequitable and unjust taxes, 
although it has the power, for the abuse of state power is con- 
trary to our theory of government, is in every respect tyranni- 
cal, and is contrary to every rational conception of political 
justice. The state takes policy-holders' money, but returns no 
proper equivalent in additional protection, and it diminishes the 
security to policy-holders by placing in ultimate jeopardy the 
funds of the companies accumulated for the faithful discharge 
of contractual obligations. 

Life Insurance is a Semi-Public Function. 
Life insurance companies are semi-public institutions and 
they perform a semi-public function. By the long-established 
305 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

system of state supervision, the states, in a large measure, have 
become the responsible guardians of these companies and of 
the vast interests represented by them in the form of trust 
funds and contractual obligations. For the state and the 
federal governments on the one hand to insist upon the most 
rigid economy in administration, absolute security in the in- 
vestment of funds, and sound theory in the actuarial assump- 
tions, and on the other to tax and to tax again the premium 
income, or the total income, or the net income, or the reserve, or 
the surplus, and, in addition to these, impose fees and charges 
for state supervision and agents' licenses, state or municipal, 
presents a curious contrast in public policy and the certainty 
of fundamental errors in public finance. For if the states and 
the federal government continue to tax and to take away a 
part of the income at an increasing rate, as has been the 
case during the last twenty years, the time must come when 
a further increase x in the tax rate must imperil the very 
existence of the institutions. For the possible impairment of the 
contractual obligation, for the failure of the companies to meet 
the rightful expectations of the policy-holders, the responsi- 
bility will rest with the state and the federal governments and 
not with the administrative officers of the companies. 

Need of Expert Knowledge of Insurance. 

It is perhaps but natural that the law-makers should have 
but little expert knowledge on the subject of insurance, and 
that lawyers who have given much time and thought to the 
practical aspects of taxation should be ignorant of, or indif- 
ferent to, the rights of insurance policy-holders and the serious 
menace to their interests involved in excessive taxation. This 
point of view was very ably emphasized in an address by the 
late Mr. John A. Finch, one of the few members of the legal 
profession thoroughly familiar with insurance law, theory and 
practice, who said in part, as follows: 

"There is no law book on our shelves that gives the faintest 
suggestion of the underlying principles of insurance, nor which 
306 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

shows how the insurance companies are affected by legislation. 
The latest work on the law of insurance is the most ambitious, 
containing four large volumes now in press. I have read the ad- 
vance sheets and while I commend the work, I can but note its 
deficiency in this respect. The average lawyer, as a legislator, is 
as ignorant of the subject of insurance — the principles under- 
lying the business — as is the average legislator of any other 
vocation. 

There is no business that can so readily protect itself from 
the results of hostile legislation or harsh interpretation of its 
contract as the business of insurance. If compelled to pay a 
heavy tax or deprived of making a defense to an unmerited 
claim, the remedy is, to the fire insurance company, by an 
increase in the premium charges; and, to the life insurance 
company, by a diminution of the dividends to its policyholders. 
If the statute law is such that a life company is made the subject 
of imposition of any kind, against which it is helpless to defend 
itself, its only remedy is by lessening the dividend. The policy- 
holder is the sufferer." 

The Problem Re-Stated. 

I have gone far enough into the technical side of the sub- 
ject of life insurance taxation to emphasize its importance as 
a practical question confronting the companies and their policy- 
holders at the present time. I have shown that over twelve 
million dollars per annum are paid out in taxes, fees, and 
licenses, equivalent to more than two per cent, of the 
premium income and one and three-quarters per cent, of 
the total income. I have further shown that the tax ratio 
has increased from 1.42 per cent, in 1890 to 2.15 per cent, of 
the premium income in 1909, and it may safely be predicted 
as a practical certainty that taxation will materially increase 
in the next two years unless the appeals of the companies and 
their policy-holders are heeded in rightful appreciation of the 
justice of their case. The Federal Corporation Tax, as far as 
it applies to life insurance companies, should be repealed at 
the next session of Congress, and the state legislatures through- 
out the country should be impressed with the justice and the 
morality of the suggestion of Mr. Dryden, that the tax be 

307 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

reduced to one per cent, of the premium income in all the states 
where a higher rate of taxation is charged at the present time. 

Official Suggestion for Increased Taxation. 
The danger which confronts life insurance policy-holders is 
far more serious than generally assumed and for the future 
security of the funds and the absolute guarantee of contractual 
obligations are menaces. This could not possibly be better and 
more clearly indicated than in the very recent suggestion of 
the Insurance Commissioner of Texas,* that the states might 
rightfully impose a tax upon the assets of the companies equal 
to the general property tax, which would yield three and a 
half times the amount actually paid out by them for taxes, 
licenses and fees of all kinds at the present time. The amount 
of the taxes which could thus be raised from the life insurance 
companies is calculated by the Insurance Commissioner of Texas 
at over $37,000,000, or a sum equivalent to nearly sixty per cent, 
of the total amount paid in dividends to insurance policy- 
holders during 1909. If this principle were, therefore, adopted, 
dividends to policyholders would practically cease and the 
rates for new insurance would, unquestionably have to be 
raised. The Insurance Commissioner of Texas attempts to 
sustain his plea for increased taxation by specious arguments 
drawn from general taxation experience, but he overlooks the 
fact that life insurance by its nature is totally different from 
other business enterprises and that it is not primarily con- 
ducted for gain. He overlooks the fact that insurance enor- 
mously advances public welfare and that it aids, more perhaps 
than any other factor in the accumulation of capital, by the 
aggregation of small amounts, most of which would otherwise 
be wasted and perhaps dissipated in useless or even harmful 
personal expenditures. Life insurance accumulations, in the 
words of Prof. F. A. Cleveland in his treatise on "Funds and 
Their Uses,"f increase the financial stability and security of 
the government itself, and, as he further observes, 

*The Weekly Underwriter, Aug. 28, 1909, p. 145. fp- 297. 

308 



tax burden on life insurance policyholders 

Life Insurance and the Public Welfare. 

"The effect of the enormous risks undertaken by the 
insurance companies, therefore, is not only to relieve the busi- 
ness world of speculative uncertainty in the numerous relations 
to which it is applied, but also, by the financial conservatism 
adopted to secure this end, the investment companies assist 
very materially in steadying the market and, in time of strain, 
relieving financial distress." 

A Final Plea for Tax Reduction and Uniform Laws. 

It is, therefore, unquestionably contrary to public policy 
and opposed to a rational system of public finance that a heavy 
tax burden should be placed upon the companies and that 
the burden should be continually changed or shifted by an 
increase in the rates. However much advantage there may 
be in the lack of uniformity in state laws, there are certain 
interests which require uniformity and of these there is not 
one more important than insurance. If uniformity of state 
laws in the case of negotiable instruments has been considered 
a public necessity, sufficiently so to secure their almost general 
adoption, and if it is desirable to have uniform bills of lading, 
then it would certainly seem equally desirable that there should 
also be uniformity in the method of insurance taxation, and the 
fundamental principle which should govern is that the rate 
should not exceed one per cent of the premium income. 

Conclusive Evidence of Overtaxation. 

As was said at the outset, no other commercial interest 
carries a heavy burden like this and in the evidence referred to 
by Wm. J. Graham, proof is to be found that if the insurance 
tax rate upon the gross premium income were applied to com- 
mercial enterprises, the tax would be equivalent to confiscation. 
An illustration is given of a retail drug store paying $91 in 
taxes upon the gross income and which, if taxed at the 
insurance rate of two per cent., would pay $1,280. The case 
is cited of a retail grocery paying $70 in taxes upon the gross 

309 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

income and which if taxed at the insurance rate of two per 
cent, would pay $1,239. The case of a retail dry goods store is 
cited, paying $640 in taxes upon the gross income, and which, 
if paying at the insurance rate of two per cent., would pay $6,840.* 
Other illustrations could be given, but only as accumulative 
evidence to prove that no commercial interest could bear the 
tax burden if it were imposed in a similar manner upon the 
gross income as an index of tax-paying capacity. 

Urgent Need of Cooperation of Companies, Policyholders 
and Others. 

The time has come for an agreement upon the principles 
which should govern in life insurance taxation and it is a hope- 
ful sign that the International Tax Conference has for the third 
time included the subject in its program as a question of the 
day. What has been said has been rather by way of review 
of previous efforts to interest the public at large and to bring 
about an understanding of the essential facts of the problem 
and its economic and legal aspects to life insurance policy- 
holders throughout the country. An annual tax burden of 
more than twelve millions is paid by them and by them 
only, and every addition to this burden is a hindrance 
to the growth of the business and the deliberate aim and effort 
on the part of the companies to reduce the cost of insurance. 
In ten years the business has increased 93.7 per cent, as 
measured by the premium income, while the tax burden has 
increased 87.1 per cent, during the same period of time. The 
end is not in sight, unless the policy-holders throughout the 
country take an active interest in the subject and enlist the co- 
operation of all who as economists, tax reformers, and states- 
men, desire to help and not to hinder those who in their own 
way and at their own cost, through life insurance protection, 
carry successfully into effect the social and economic duty of 
self-help. 

* The Romance of Life Insurance, by William J. Graham. 
310 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

REFERENCES 

1765 Act of March 22, 1765 (known as the Stamp Act). An Act for 
granting and applying certain stamp duties, and other duties 
in the British Colonies and plantations in America. Provides 
for the regulation and taxation of marine insurance. 

1797 First Stamp Act of the United States Congress. Chapter II, 

sec. 4. 1st Session. 5th Congress. See also Lex Mercatoria 
Americana, by George Caines, Vol. 1, p. 263. 

1798 Pitt; In Debates on the first Income Duty Bill in the Commons, 

Pitt said: " Laying aside the proud idea of the vigour, per- 
manence, and renewing energy which the measure secured, 
there is one case, which with view to the class who are really 
willing to save for the benefit of those for whom they are 
bound to provide, makes some modification. It is in favor 
of those who have recourse to that easy, certain and advan- 
tageous mode of providing for their families by insuring their 
lives." 

181 7 Park, James Allan; System of Marine Insurance, London; refer- 
ence to stamp duties, pp. 43-45; fire insurance taxes, p. 670. 

1832 Ellis, Chas.; The Law of Fire and Life Insurance; London; stamp 
duties on fire insurance, p. 17; life insurance, p. 102; annuities, 
p. 189; statutes relating to insurance taxation, p. 221. 

1837 McCulloch, J. R.; A statistical account of the British Empire. 
Taxation of insurance companies, Vol. 2, p. 511. 

1844 First Report on Joint-Stock Companies; report of Select Com- 

mittee of House of Commons; reference to influence of the stamp 
duty on life insurance operating as a check, etc. QQ. 1 791-94. 

1845 McCulloch, J. R.; A Treatise on the Principles and Practical 

Influence of Taxation, p. 284 et seq. London. 

1846 List of Persons, Copartnerships and Corporations Taxed in the 

City of Boston for the Year 1846. Tax Returns of Massa- 
chusetts Hospital Life Insurance Co., p. 78. 

1850 Bunyon; Stamp Duties on Insurance. Journal of the Institute 
of Actuaries, Vol. I, p. 71. 

1852 Babbage, Charles; Thoughts on the Principles of Taxation with 
reference to a Property Tax and its Exceptions. London. 

1852 Jellicoe, C. ; On the Inequitable Operation of the Property and 
Income Tax Enactments, as regards Life and other Interests. 
Journal of the Institute of Actuaries, Vol. II, p. 213. 

1852 Hardy, P.; An Expose' of the Fallacy "that it is just to Tax 
Temporary Annuities at the same rate as Perpetual Annui- 
ties." Journal of the Institute of Actuaries, Vol. Ill, p. 195. 

3" 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1852 Jellicoe, C; On the true measure of Liability in a system of 

Direct Taxation. Journal of the Institute of Actuaries, Vol. 
Ill, p. 1. 

1853 Taxes on Life Policies. Journal of the Institute of Actuaries, 

Vol. IV, p. 22. 

1853 Report of Select Committee on Assurance Associations, ordered 
printed by the House of Commons, August 16, 1853. Refer- 
ence to taxation, p. 298. 

1853 Heathfield, Richard; Taxation, p. 57 et seq. London. 

1855 The Insurance Monitor and Wall Street Review, Vol. 3, p. 18. 

New York. 

1856 Taxation of life insurance companies. Insurance Monitor and 

Wall Street Review, p. 64. New York. 
i860 Taxation of Life Insurance Companies in Massachusetts, 1857- 

58; Fifth annual report of the insurance commissioner, p. xiv. 
1862 Homans, Shepard; Unpublished addresses of, before life insurance 

convention, on Taxation of Life Insurance Companies. Pub. 

lished in part in Hunt's Merchants' Magazine, Vol. 46, p. 567. 
1862 Dixon, James; Speech in the United States Senate against the 

taxation of insurance companies. Congressional Globe, 37th 

Congress, 2nd Session, part 3, p. 2335. 

1862 Sumner, Charles; Speech in the United States Senate against 

taxation of insurance companies. Congressional Globe, 37th 
Congress, 2nd Session, part 3, p. 2335 et seq. 

1863 Association for the Abolition or Reduction of the Duty on Fire 

Insurance; A History of the Agitation for its abolition or 
reduction, showing the duty to be bad in Principle, Obstruc- 
tive to the Progress of Insurance, and Opposed to Public 
Interest. London. 

1863 Annual Report of the Secretary of the Treasury of the United 
States, p. 63. 

1863 Redfield, Amasa A.; Handbook of the United States Tax Law. 
References to insurance, pp. 32, 51, 54, 103, 104, 105, 106, 
204, 252. New York. 

1863 Taxpayers' Manual, pp. 45, 75, 77, 98, 100. Appleton and Co., 

New York. 

1864 Boutwell, George S. ; A Manual of the Direct and Excise Tax 

Systems of the United States, pp. 73, 98, 107, 126, 152, 155, 
204, 219, 261. Boston. 
1864-65 Dresser, Horace; The Internal Revenue Laws, Act approved 
June 30, 1864, as amended March 3, 1865. References to 
insurance: agent's license, p. 38; foreign, p. 38; broker's license, 
p. 42. New York. 

312 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1866 Laws of the United States relating to internal revenue, in force 
August 1, 1866, para. 64 and 77. 

1866 Peto, Sir S. Morton; Taxation, Its Levy and Expenditure, pp. 

58, 73, 118, 121, 220. New York. 

1867 Taxation of Life Insurance in Massachusetts. Twelfth annual 

report of the insurance commissioner, p. x. 

1868 Insurance Taxation. Insurance Times, Vol. 1, p. 52. 

1869 Internal Revenue Taxation of Life Insurance Companies. Sta- 

tistical Table, 1865-68. Hunt's Merchants' Magazine, Vol. 
60, p. 104. 

1869 Wells, David A., Special Commissioner of the Revenue of the 

United States; Official report. Reprinted by the Cobden 
Club, London, 1870. Reference to insurance taxation, pp. 
77-78. 

1870 Taxation of Insurance Companies in Maine. Insurance Times, 

P- 37- 

1870 Taxation and Dividends in Life Insurance. Insurance Times, 
Vol. 3, pp. 37, 53, 183. 

1870 Wright, Elizur; Taxation of Life Insurance Companies. Insur- 
ance Times, Vol. 3, p. 265. 

1870 War Revenue Taxes on Life insurance companies. Insurance 

Times, p. 404. 

1 87 1 Committee on taxes, fees, and deposits, report of. Report First 

National Insurance Convention,, p. 88. Minority report of, 
and discussion, p. 113 et seq. 

187 1 Green, Jacob L. ; Taxation of Mutual Life Insurance Companies. 
Hartford. 

1 871 Harvey, Augustus F.; Resolution on taxation of life insurance 
companies. Report First National Insurance Convention, 
p. 41. 

1871 Olcott, Henry S. ; Tabulated digest showing taxes and other 
requirements of states and territories as regards life insurance 
companies. Report First National Insurance Convention. 

1871 Winston, F. S.; Resolution that life insurance should be entirely 
exempt from taxation. Report First National Insurance Con- 
vention, p. 21. 

1 87 1 Taxation of Life Insurance is a Tax upon Prudence. The Spec- 

tator, November, 1871, p. 439. 

1872 Taxation of Life Insurance Companies in Various States in 1872, 

including important table. Insurance Times, pp. 446-447. 
1872 Taxation of Life Insurance Companies in the Different States. 
Insurance Times, p. 782. 

313 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1872 Alfriend, E. M.; Resolution on insurance taxation, recommending 
a tax of 1% on the gross receipts of fire and marine companies, 
and endowment policies of life companies, and the exemption 
from taxation of all life policies issued on the lives of husbands 
and fathers for the benefit of women and children. Report 
Second National Insurance Convention, p. 181. 

1872 Breese, L. ; Remarks on insurance taxation. Report Second 
National Insurance Convention, pp. 128, 144, 175. 

1872 Caldwell, W. W. ; Remarks on insurance taxation. Report Second 
National Insurance Convention, pp. 163, 184. 

1872 Committee on Taxation; Supplementary report of. Report 
Second National Insurance Convention, p. 71. 

1872 Hartranft, J. F.; Remarks on insurance taxation. Report Second 
National Insurance Convention, p. 133. 

1872 Harvey, A. F. ; Resolution, "that it is the sense of this Conven- 
tion that it is impolitic to assess taxes upon the premium 
receipts of insurance companies." Report Second National 
Insurance Convention, p. 182. Remarks on insurance taxa- 
tion, p. 173. 

1872 Kelsey, Henry C. ; Remarks on insurance taxation. Report 
Second National Insurance Convention, pp. 148, 182. 

1872 Reynolds, R. M.; Remarks on insurance taxation. Report Second 
National Insurance Convention, p. 130. 

1872 Spencer, J. M.; Remarks on insurance taxation. Report Second 

National Insurance Convention, p. 150. 

1873 Third report of the Insurance Commissioner of Kansas. Refer- 

ence to views of John Stuart Mill on taxation of life insur- 
ance, p. 15. 
1873 Internal Revenue Laws, 1861-73, Washington, 1898. Refers to 
insurance taxation in the Acts of July 1, 1862 to July 17, 1862, 
pp. 61-63; Acts of Dec. 25, 1862 to March, 1863, pp. 87-88, 
91-94; Acts of Jan. 3, 1864 to July 4, 1864, pp. 170-172, 179- 
180, 196. 

1873 Taxation of Life Insurance Companies in England. Third report, 

Royal Commission on Friendly Societies, [C. 842] p. 183. 

1874 Stamp duties on life policies. Fourth report of the Royal Com- 

mission on Friendly Societies, [C. 961] p. 132. 
1874 Taxation of insurance companies in different states. Insurance 
Times, 1874, pp. 130, 136, 137. 

1874 Walford, Cornelius; Insurance Cyclopedia, Vol. 3; fire insurance 

duties, p. 419; stamp taxes, p. 552 et seq. 

1875 Wright, Elizur; Insurance and Taxation. Insurance Times, 

1875, P- 45- 

314 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1875 Taxation of life insurance companies. Spectator, 1875, pp. 

246, 367. 
1875 Taxation of life insurance companies in Michigan. Insurance 

Commissioner's Report, 1875, p. 6. 
1875 Doyle, Peter; Remarks on insurance taxation. Report Fifth 

National Insurance Convention, p. 20. 
1875 Lewis, Charlton T.; Address on insurance taxation. Report 

Fifth National Insurance Convention, pp. 16, 18. 
1875 Nye, Joshua; Resolution on insurance taxation. Report Fifth 

National Insurance Convention, p. 11. 
1875 Pillsbury, Oliver; Remarks on insurance taxation. Report Fifth 

National Insurance Convention, p. 19. Resolution, "that it 

is wrong in principle to tax the aggregate receipts of insurance 

companies," p. 27. 
1875 Row, Samuel W. ; Remarks on insurance taxation. Report 

Fifth National Insurance Convention, p. 19. 
1875 Smith, R. J.; Address on insurance taxation. Report Fifth 

National Insurance Convention, pp. 12-15. 
1878 Mill, John Stuart; Principles of Political Economy, (From the 

Fifth London edition). Vol. 2, pp. 407-8, 463. 
1880 Taxation of gross premium income. Insurance Monitor, 1880, 

p. 180. 
1880 Taxation of Life Insurance in Massachusetts. Insurance Com- 
missioner's Report, 1880, p. 15. 
1880 Argument against the taxation of life insurance companies. 

Spectator, p. 254. 
1880 Taxation of income of life insurance companies. Spectator, 

PP. i55» 243. 
1880 Taxation of life insurance in Massachusetts. Insurance Time6, 

p. 499. 
1880 Taxation of life premiums in Victoria. Reprint of article in 

Insurance Gazette of Ireland. Insurance Times, May, 1880, 

P- 295. 
1880 Insurance Taxation in New York. Insurance World, Pitts- 
burgh, May, 1880, p. 33. 
1880 National taxation of life insurance. Insurance Monitor, p. 187. 
1886 Taxation of Life Insurance Companies. Spectator, 1886, p. 339. 
1886 Taxation of Certain Insurance and Banking Companies. Report 

of Committee on Claims, House of Representatives, 49th Con- 
gress, 1st Session, Feb. 12, 1886. 
1886 Bailey, A. H.; The Income Tax, Its Incidence on Assurance 

Companies, Journal of the Institute of Actuaries, Vol. XXV, 

P- 3*4- 

315 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1886 Thomas, H. A.; Income Tax In a Mutual Fire and Life Office. 

Journal of the Institute of Actuaries, Vol. XXV, p. 36. 

1887 Taxation of life insurance companies. Weekly Underwriter, 

1887, Vol. 1 : pp. 291, 299, 300, 322, 403, 417, 473; Vol. 2 : pp. 
161, 226, 243, 447. 

1888 Report of the Tax Commission of Maryland to the General Assem- 

bly, January, 1888, p. 59. 

1889 Colquhoun, E.; Legal Stamp Duty on Re-assurance Policies 

effected by way of guarantee on a copy of the original policy. 
Journal of the Institute of Actuaries, Vol. XXVIII, p. 166. 

1889 Newbatt, B.; The Income Tax, Its Incidence on Assurance Com- 
panies. Journal of the Institute of Actuaries, Vol. XXVIII, 
p. 280. 

1 89 1 Taxation of life insurance companies in Michigan — the pro- 
posed increase from 2% to 3%. Weekly Underwriter, 1891, 
p. 203. 

1 891 Committee on Legislation, report of, recommending appointment 

of committee for the consideration of reduction in taxation 
upon insurance, etc. Proceedings Twenty-second National 
Convention of Insurance Commissioners, p. 55. 

1892 Ackland, T. G. ; Income Tax on Annuities. Journal of the Insti- 

tute of Actuaries, Vol. XXXI, p. 81. 
1894 Report of the Joint Special Committee on Taxation to the Senate 

and House of Representatives of Massachusetts. Boston. 

pp. 11 et seq. (See also pp. 83-89.) 
1894 Gould, John M. and Tucker, George F. ; The Federal Income 

Tax Explained, pp. 9. 20, 63, 65, 68. Boston. 

1894 Barrand, Arthur Rhys; Some Legal Points arising in Life Assur- 

ance Practice. Taxes on Life Insurance Policies. Journal of 
the Institute of Actuaries, Vol. XXXIII, p. 226. 

1895 Faulks, J. E. ; Some Notes on Sinking Fund Assurances. Taxa- 

tion and sinking fund assurances policies. Journal of the 

Institute of Actuaries, Vol. XXXIV, p. 572. 
1895 Fraser, A.; Income Tax on Annuities Certain. Journal of the 

Institute of Actuaries, Vol. XXXIV, p. 102. 
1895 Taxation of insurance companies. 27th Annual Report of the 

Insurance Superintendent of Illinois, 1895, p. xvi. 
1895 Wyman; United States Income Tax Law for Business Men. 

Exemption of Insurance Companies under the United States 

Income Tax Law of 1894, pp. 23-24. 
1895 Relation of Insurance to the Income Tax. Spectator, Vol. 54, 

1895, p. 167. 
1895 Taxation of life insurance. Spectator, Vol. 53, 1895, pp. 174, 189. 

316 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1895 Foster, Roger, and Abbot, Everett V.; A Treatise on the Federal 

Income Tax under the Act of 1894. Pp. 129, 132. Boston. 

1896 Faulks, J. E.; Insurance Taxation and Debentures. Journal of 

the Institute of Actuaries, Vol. XXXV, p. 154. 
1896 Stamp Act of the Cape Colony of 1898. Journal of the Institute 
of Actuaries, Vol. XXXV, p. 383. 

1896 Taxation of life policies. Insurance World, 1896, p. 18. 

1897 Taxation of Surrender Values of Life Insurance Policies in In- 

diana. Rough Notes, Sept. 9, 1897. 

1897 Report of the Commission appointed to Inquire into Revising 

and Amending the Laws of the Commonwealth Relating to 
Taxation, Boston, 1897. Reference to insurance companies: 
p. 23 et seq. 

1898 Butler, Ralph; The War Revenue Tax. Indicator, 1898. 
1898 Green, Jacob L. ; The War Taxes on Insurance. 

1898 Taxation of paid-up life policies in Indiana. The Vindicator, 
Feb. 1, 1898. 

1898 Fire Insurance and Taxes. Article in Insurance Journal, Hart- 
ford, Conn., reprinted in the Weekly Underwriter, 1898, Vol. 
58, p. 415- 

1898 Stamp Duties under the Laws of July 1862-64, compared with 
H. R. Bill 10883, introduced April 23, 1898. Published by 
the Bureau of Statistics, Treasury Department, Washington, 
D. C, p. 1480. 

1898 Eastman, Frank M.; Taxation for State Purposes in Pennsylvania. 
Tax on Premiums of Insurance Companies, Chap. VII. 

1898 War taxation of life insurance. Extended article, with letters 

from presidents of insurance companies. Baltimore Under- 
writer, July 5, 1898. 

1899 Circular 527, Commissioner of Internal Revenue, Treasury De- 

partment, Instructions Concerning Returns of Legacies, etc., 
under War Revenue Law of 1898, including a table showing 
the present worth of an annuity or life interest, etc., indirectly 
bearing upon the problem of taxation. See also regulations 
and instructions, Series No. 7, revised Jan. 28, 1899. 

1899 Faulks, J. E.; Income Tax as affecting Life Offices. Journal of 
the Institute of Actuaries, Vol. XXXVIII, p. 297. 

1899 King, G. ; Allowance for Income Tax, as affecting the value of a 
life interest. Journal of the Institute of Actuaries, Vol. 
XXXVIII, p. 344. 

1899 Faulks, J. E.; Liability of Life Assurance Companies to pay upon 
Income arising from Investments in Foreign Countries. Jour- 
nal of the Institute of Actuaries, Vol. XXXVIII, p. 311. 

317 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1899 Mayo-Smith, Richmond; Statistics and Economics, Part 2. Ref- 
erences to taxation, pp. 407, 408, 419. New York. 

1899 Mathews, W. F.; Taxation of insurance companies, methods of 

reporting and collecting, defects and remedies. Address before 
Thirtieth Annual Convention of Insurance Commissioners. 

1900 Batterson, James G. ; Taxation of Life Insurance. Weekly Under- 

writer, 1900, p. 189. 

1900 Stone, J. P.; Repeal of the war revenue tax. Rough Notes 
Indianapolis, December, 1900. 

1900 Arguments against Wisconsin law taxing life insurance com- 
panies. Extracts and references. Investigator, 1900, p. 755. 

1900 Repeal of the war revenue tax. Insurance Economics, p. 205. 

1900 Hoffman, Frederick L. ; History of the Prudential Insurance 
Company of America, 1 875-1900. Reference to taxation, p. 256. 

1900 The War revenue stamp tax on life insurance policies, Insurance 
Critic, December, 1900, p. 403. 

1900 The War Tax on Insurance, New York Evening Post, December 
7, 1900. 

1900 Dyer, Charles E.; Taxation of Life Insurance Companies, Argu- 
ment before the Wisconsin Tax Commission, Oct. 23, 1900. 

1900 Chamber of Commerce of the State of New York, report of the 
committee on state and municipal taxation, submitted October 
4, 1900, pp. 17, 24, 25, 28, 30, 31 and 33. 

1900 Batterson, James G. ; Taxation, what it is and ought to be. 
Address before Thirty-first Annual Convention of Insurance 
Commissioners. 

1900 Payne, Sereno E. ; Argument in Congress for repeal of war revenue 
tax. Congressional Record, 56th Congress, 2nd Session, VoL 
34, p. 247. 

1900 Reducing taxation under war revenue law. Insurance World, 
P- 835. 

1900 Seligman, E. R. L. ; Essays in Taxation. References to Taxation 
of Insurance Companies: pp. 139, 141-154, 168, 170, 178, 179, 
203, 205, 237, 242, 260, 279, 405, 420. New York. 

1900 McKinley, Wm., President of the United States; Message to 
56th Congress, 2nd Session. Recommending reduction in 
insurance stamp taxes. Congressional Reocrd, Vol. 34, Part 
1, p. 8. 

1900 U. S. war revenue stamp taxes on fire insurance policies. Circular 
issued to companies by the National Board of Fire Under- 
writers. 

1900 Merrill, Willard; Taxation of Life Insurance Companies, Argu- 
ment before the Wisconsin Tax Commission, Oct. 2, 1900. 

3i8 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1901 Chandler, Senator; Remarks against taxation of insurance com- 
panies. Congressional Record, 56th Congress, 2nd Session, 
Vol. 34, p. 1991 et seq. 

1 90 1 Allison, Senator; Remarks against taxation of insurance com- 
panies. Congressional Record, 56th Congress, 2nd Session, 
Vol. 34, p. 1987 et seq. 

190 1 Hoar, Senator; Remarks against taxation of insurance companies. 
Congressional Record, 56th Congress, 2nd Session, Vol. 34, p. 
1988 et seq. 

190 1 Robinson, C. H.; Remarks on insurance taxation. Proceedings 
Thirty-second Annual Convention of Insurance Commissioners, 
p. 23 et seq. 

1 90 1 Fryer, Greville E, Treasurer, Insurance Company of North Amer- 
ica ; The Excessive Taxation of Insurance Companies. Paper 
prepared for National Civic Federation Conference on Taxa- 
tion, Buffalo. 

1 90 1 Taxation of life insurance companies in New York. Extended 
discussion in Weekly Underwriter, Feb. 9, 190 1. 

1 90 1 Taxation of insurance in the State of New York. Weekly Under- 
writer, March 2, 1901. 

190 1 Insurance taxation in the State of New York. Extended article 
in Weekly Underwriter, including text of bill, 1901. 

190 1 Hoffman, Frederick L. ; Taxation of Life Insurance Interests. 
Address at National Civic Federation Conference on taxation, 
Buffalo. 

1 90 1 First Biennial Report of Wisconsin State Tax Commission, Madi- 
son, 1 90 1. Reference to life insurance companies; Hearings 
of representatives, p. 12; Taxation, pp. 33 and 73; Taxes paid 
in 1899 and 1900, p. 121. 

1 90 1 Hamilton, Willard I.; Taxation of life insurance companies. 
Reference in address. Ohio State University, April 14, 1901. 

1901 Clapperton, George; Taxation in various states and in Canada, 
with special reference to the taxation of corporations. Indus- 
trial Commission, Report of Vol. XI, Part VII. References 
to insurance : pp. 19, 33, 42, 51, 61, 76, 117, 126, 149, 164. 

1 90 1 Chapman; Treatise on the English Income Tax. Life insurance 
deductions, p. 50, 16th edition. London. 

1901 Flint, Josiah D. ; Taxation of Fire Insurance Companies. Refer- 
ence to in " Fire Insurance," Address to Policyholders. Phila- 
delphia. 

1 90 1 Taxation of insurance companies in Connecticut. Reference in 
report of State Board of Equalization, giving valuation of the 
stocks of insurance corporations, 1901. 

319 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1 90 1 The True Principle of Fire Insurance Taxation. Editorial in 
Newark Evening News, Feb. 11, 1901. 

1901 Taxing insurance companies' surplus. Insurance and Commer- 
cial Magazine, Feb., 1901. 

1 90 1 The Practice of Life Insurance Taxation. Public Policy, July 

6, 1901. 

1902 Alexander, J. W. ; Remarks on insurance taxation. Proceedings 

Thirty-third Annual Convention of Insurance Commissioners, 
PP- !35. i3 6 - 

1902 McCall, John A.; Remarks on insurance taxation. Proceedings 
Thirty-third Annual Convention of Insurance Commissioners, 
p. 81. 

1902 Robinson, M. H.; A History of Taxation in New Hampshire. 
References to insurance taxation, pp. 119 and 131. 

1902 Decision of Supreme Court of Illinois in regard to law taxing 
insurance companies 2% on gross receipts, and that the same 
is unconstitutional. 

1902 Taxation of life insurance. Discussion in the Traveler's Record, 
1902. 

1902 Taxation of life insurance companies in Kentucky. The Inves- 
tigator, Chicago, 1902. 

1902 The Gresham Life Insurance Society and the Income Tax Ques- 
tion. London Review, March 5, 1902. 

1902 A Company Taxed out of Business. Reference to Sun Life of 
Louisville. Spectator, Dec. 25, 1902. 

1902 Nicoll, John.; Actuarial Aspects of Recent Legislation in the 
United Kingdom and other Countries, on the subject of Com- 
pensation to Workmen for Accidents. Taxation on Policies 
of Insurance. Journal of the Institute of Actuaries, Vol. 
XXXVI, p. 543- 

1902 Insurance taxation in Kentucky. Weekly Underwriter, March 

1, 1902. 

1903 Report of the State Tax Commission of Missouri, 1903, p. 209. 

(Digest of revenue laws.) 

1903 Bastable, C. F. ; Public Finance, 3rd edition, 1903, p. 492, Eco- 
nomics of Insurance Taxation. 

1903 Cooley, Thomas M., LL. D.; A Treatise on the Law of Taxation, 
including the law of local assessments. Third edition, Calla- 
ghan and Co., Chicago, pp. 700-704, 11 12, 11 13. 

1903 Government Burdens on Insurance Companies in Various 
Countries. Extract from article in the Post Magazine, 
London, reprinted in The Weekly Underwriter, Nov. 14, 1903, 
P- 3 2 7- 

320 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1903 Judson, Frederick N.; A Treatise on the Power of Taxation, 

State and Federal, in the United States. St. Louis, 1903. 
References to insurance: Sections 147, 160, 183, 284, 459. 

1904 Linehan, John C. ; Remarks on taxation of fraternal and legal 

reserve life insurance companies. Proceedings Thirty-fifth 
Annual Convention of Insurance Commissioners, p. 173. 

1904 In the Matter of Mistaken Taxation. A Leaflet addressed to 
policyholders by the Mutual Life Ins. Co., of New York, dated 
May 2, 1904. 

1904 Reasons Why there should be No Taxes levied on Life Insurance 
Premiums or Reserves and No License Tax on the Business. 
By Mutual Life Ins. Co. of New York. Published in Weekly 
Underwriter, May 7, 1904. 

1904 Some Objections to the Taxation of Life Insurance Policies issued 
for the protection of Families. Address to policyholders in 
mutual life insurance companies. Distributed by the Mutual 
Life Insurance Company of New York. Published in Insurance 
Topics, Boston, May, 1904. 

1904 Why the Members of the Mutual Life Could Not be Taxed. In- 
surance Monitor, 1904, p. 213. 

1904 Fouse, L. G. ; Taxation of life insurance companies. 

1904 Foster, Sydney A.; A Tax on Thrift. Argument before the Legis- 
lative Assembly of Iowa, in favor of repeal of 2%% tax on life 
premiums. Published in the Insurance World. 

1904 Address to Holders of Life Insurance Policies on the Taxation 
of Life Insurance Companies. Mutual Life Insurance Co. of 
N. Y. 

1904 A Few Queries and A Few Facts. Address to Life Insurance 
Policyholders. Mutual Life Ins. Co. of New York. 

1904 The Tax on Morality. An article on insurance taxation, pub- 
lished in the Statement of the Mutual Life Ins. Co., Dec, 1904. 

1904 Pattison, John M.; Taxation of life insurance. Address before 
the National Association of Life Underwriters, 1904. 

1904 The Tax Bill of Forty-two Life Insurance Companies Operating 
in the City of New York. Article in The Spectator. 

1904 Faulks, J. E. ; The Income Tax and Perpetual Life Offices in 
England and Wales. Post Magazine and Insurance Monitor, 
Feb. 6, 1904. 

1904 Taxation of life insurance companies in France. Article in Lon- 

don Review, April 6, 1904. 

1905 La Follette, Gov.; Views of, on the taxation of life insurance 

companies, in his message of 1905, reprinted in the Weekly 
Underwriter, Jan. 21, 1905. 

321 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1905 Insurance Taxation in Wisconsin. Article in Weekly Under- 
writer, Feb. 18, 1905. 

1905 Taxation of life insurance in America. Article in London Review, 
Nov. 17, 1905. 

1905 Taxation of Insurance Companies in Barbados. Consular Report, 
1905. 

1905 Fricke, Wm. A.; Remarks before the Assembly Committee on 
Insurance of the State of Wisconsin on Bill No. 434a, March 
2, 1905. 

1905 Income Tax, Report of a Departmental Committee on [Cd. 2575], 
with Minutes of Evidence and appendix [Cd. 2576], 1905. See 
index under Terminable Annuities and Taxation of Life Annui- 
ties. Questions 731-732. Also. p. IX et seq. of the report of 
the Committee. 

1905 Fire Insurance Taxes and Fees. Published by the Spectator 
Company, New York. 

1905 Return to the House of Commons showing which of the Colonies 

have established systems of Graduated Income Taxes, London, 
1905 (Pari, paper 196). References to taxation of insurance 
companies, pp. 45, 67, 95. 

1906 de Cerenville, Max; Insurance Taxation in Switzerland. Pro- 

ceedings Fifth International Congress of Actuaries. 
1906 Emminghaus, A.; Taxation of Insurance. Proceedings Fifth 

International Congress of Actuaries. 
1906 Faulks, J. E. ; Insurance Taxation in Great Britain and Ireland. 

Proceedings Fifth International Congress of Actuaries. 
1906 German Society of Insurance Science; Insurance Taxation in 

the German States: Proceedings Fifth International Congress 

of Actuaries. 
1906 Gram, J. P.; Insurance Taxation in Denmark. Proceedings 

Fifth International Congress of Actuaries. 
1906 Gray, James M. ; Limitations of the Taxing Power. San Francisco. 
1906 Herlitz, Karl; Insurance Taxation in Sweden. Proceedings Fifth 

International Congress of Actuaries. 
1906 Klang, James; Insurance Taxation in Austria. Proceedings 

Fifth International Congress of Actuaries. 
1906 Ogden, Sydney V.; Insurance Taxation in the United States. 

Proceedings Fifth International Congress of Actuaries. 
1906 Pannier, Georges; Insurance Taxation in France. Proceedings 

Fifth International Congress of Actuaries. 
1906 Roth, Paul; Insurance Taxation in Hungary. Proceedings Fifth 

International Congress of Actuaries. 

322 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1906 Sim, W. A.; Insurance Taxation in the United Kingdom. Pro- 
ceedings Fifth International Congress of Actuaries. 

1906 Zartman, L. W. ; Investments of Life Insurance Companies. 

Reference to Insurance Taxation, pp. 192-193, 213-233. 

1907 Hoffman, Frederick L. ; Remarks on insurance taxation. Pro- 

ceedings Thirty-eighth Annual Convention of Insurance Com- 
missioners, p. 163. 

1907 Kingsley, Darwin P.; Remarks on insurance taxation. Pro- 
ceedings Thirty-eighth Annual Convention of Insurance Com- 
missioners, p. 12 z. 

1907 Prewitt, H. R.; Resolution for appointment of special committee 
on insurance taxation. Proceedings Thirty-eighth Annual 
Convention of Insurance Commissioners, p. 30. 

1907 Huebner, Solomon S.; The Taxation of Life and Fire Insurance 
Companies, Address at First National Conference on State 
and Local Taxation, Columbus. Addresses and proceedings, 

P. 595- 

1907 Breckenridge, Ralph W. ; Argument in behalf of the National 
Board of Fire Underwriters before the Sub-Committee on 
Taxation of the National Convention of Insurance Commis- 
sioners, Louisville, Ky., Dec. 1907. 

1907 Olin, John M. ; Taxation of Life Insurance Companies. Argument 
submitted on the different bills affecting taxation of life insur- 
ance companies. 

1907 Third Biennial Report of the Wisconsin Tax Commission, Madi- 
son, 1907. References to insurance companies; (License fees) 
pp. 172, 173; (Mortgage loans), 354, 357-360, 365. 

1907 Olin, John M.; Taxation of Life Insurance Companies, a State 
ment of the Laws in the Different States, etc., read before 
the Joint Committee of the senate and assembly on banks and 
insurance. 

1907 Olin, John M.; An appeal to the members of the Assembly on the 
question whether simple justice shall be done the Northwestern 
Mutual Life Insurance Company in the matter of taxation. 

1907 Olin, John M.; Statement on behalf of the Northwestern Mutual 
Life Insurance Company, on Substitute Amendment No. is 
to No. 454s. 

1907 Taxation of life insurance. Extended article in the Eastern 
Underwriter, March 21, 1907. 

1907 Rittenhouse, E. E. ; Taxation of insurance in Colorado. Bulletin 

No. 4, Insurance Department, Oct. 30, 1907. 

1908 Alexander, William; Why Life Insurance Companies are taxed 

and Why they should not be taxed. The Spectator, July 2, 1908 

323 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1908 Bradshaw, T., Managing Director, Imperial Life Assurance Co. 

Toronto; Taxation of Life Assurance Companies in Canada 

Paper read at Second International Conference on State and 

Local Taxation, Toronto. Addresses and proceedings, p. 

343 et seq. 
1908 Committee of National Convention of Insurance Commissioners. 

Report of, on Life Insurance Taxation, Detroit, August, 1908. 
1908 Cox, Robert Lynn; Objects of the Conference on Insurance Taxa 

tion and necessity for cooperation. Second Annual Meeting 

Association of Life Insurance Presidents, New York. 
1908 Cox, Robert Lynn; Taxation of Life Insurance in the United 

States. Address at International Conference on State and 

Local Taxation, Toronto. Addresses and proceedings, p. 363 

et seq. 
1908 Cox, Robert Lynn; Brief upon the Questions involved in the 

matter of reporting " Taxes due or accrued." 
1908 Dryden, John F. ; Taxation of Life Insurance in the United 

States. Address, Second Annual Meeting Association of Life 

Insurance Presidents, New York. 
1908 English, J. L., Aetna Life; Brief Review of the Argument in 

favor of the taxation of life insurance. 
1908 Fouse, L. G. ; Effect of Insurance Taxation on Social and Politica 

Economy. Paper submitted at Tax Conference of the Association 

of Life Insurance Presidents. 
1908 Hartigan, John A.; Should the item of accrued taxes in reports 

be treated as a liability? Proceedings Thirty-ninth Annual 

Convention of Insurance Commissioners, p. 161 et seq. 
1908 Kelsey, Otto, Superintendent of Insurance, New York State 

Fees and Taxes charged New York Insurance Companies by 

Insurance Departments of other States. 
1908 Prewitt, H. R.; Plea to the Governor (Kentucky) for tax reform 

in Insurance. 
1908 Prewitt, H. R.; Report of committee on insurance taxation. 

Proceedings Thirty-ninth Annual Convention of Insurance 

Commissioners, p. 50 et seq. 
1908 Rittenhouse, E. E. ; Taxation of Insurance Premiums. 
1908 Smith, Samuel Bosworth; A Message from the South and West. 

Address, Second Annual Meeting Association of Life Insurance 

Presidents, New York. 
1908 United States Casualty Co.; Brief on Taxation of Insurance. 
1908 West, Max, Ph. D.; The Inheritance Tax. Reference to taxation 

of life insurance companies, p. 216. New York. 
1908 Williams, W. M. J.; The King's Revenue, p. 167. 

324 



TAX BURDEN ON LIFE INSURANCE POLICYHOLDERS 

1908 Zartman, Lester W., Ph. D.; Necessity for reform of life insur- 

ance taxation. Address, Second Annual Meeting Association 
of Life Insurance Presidents, New York. 

1909 De Boer, Joseph Arend, President National Life Insurance Com- 

pany; Taxation of Level Premium Life Insurance. Addres 
at Third International Conference on State and Local Taxa- 
tion, Louisville. Addresses and proceedings, p. 129 et seq. 

1909 Fiske, Haley, Vice-President Metropolitan Life Ins. Co.; Life 
Insurance Taxation and Legislation. Address Annual Meeting 
of the Association of Life Underwriters of Baltimore, Md. 

1909 Foote, Allen R.; The Federal Tax on Corporate Incomes. Text 
of the law and editorial comments. 

1909 Graham, William J.; Taxing a tax. Chap. IX of The Romance 
of Life Insurance, The World Today, Chicago. 

1909 Hart, W. O.; The License Tax System in Louisiana. Paper read 
at the Third International Conference on State and Loca 
Taxation, Louisville. Addresses and proceedings, p. 275 et seq. 

1909 Hoffman, Frederick L. ; The Tax Burden of Life Insurance Policy- 
holders. Address at Third International Conference on State 
and Local Taxation, Louisville. Addresses and proceedings, p. 
149 et seq. 

1909 Lindabury, Richard V. and Duffield, Edward D.; Brief sub- 
mitted for The Prudential Insurance Company of America in 
the question of equalization of taxes before the New Jersey 
Supreme Court. 

1909 Noel, James W. ; The Taxation of Insurance. Paper read at 
Third International Conference on State and Local Taxation 
Louisville. Addresses and proceedings, p. in et seq. 

1909 Noyes, George H.; Taxation of Life Insurance Companies, Brief 
submitted committee of Wisconsin State Legislature. 

1909 United States Internal Revenue, Regulations No. 31.; Law and 

Regulations relative to excise tax on Corporations, Joint Stock 
Companies, Associations and Insurance Companies. 

1910 Commissioners of His Majesty's Inland Revenue, Fifty-third 

Report of; London, 19 10 [Cd. 5308]. Receipts from stamp 

tax on life insurance policies, p. 64. 
1910 Stempesteuerbestimmungen und Tarife fur Versicherungsvertrage 

von Theodor Ehrenfried, Stuttgart. 
1910 Obstacles which Delay Reform of Insurance Taxation, by Thomas 

Sewall Adams. Address at Fourth Annual Meeting of the 

Association of Life Insurance Presidents. 
Annual — Statistics of taxes paid, under Exhibit of Expenses, etc., in 

the insurance yearbooks of The Spectator Co., New York. 

325 



CHAPTER VIII. 
THE ENGLISH ASSURANCE COMPANIES ACT OF 1909. 

The life insurance companies of England have been under 
government supervision since 1870, and with slight amend- 
ments passed in 187 1 and 1872 the act has remained unchanged 
until the close of last year, when the Assurance Companies 
Act of 1909 went into effect on December 3d. An interesting 
historical account of the first act was published soon after its 
passage in the October issue of The Spectator for 1870, and 
in this article the origin of the act is attributed to the failure 
of the European and Albert insurance companies. The new 
act is in part the result of similar causes, for in 1906, after the 
disclosures of the New York legislative investigation and the 
subsequent failure of the Mutual Reserve, which had trans- 
acted a considerable amount of business in England, a special 
committee of the House of Lords was appointed "to inquire 
and report as to what steps should be taken, by deposit of 
funds or otherwise, to provide adequate security for British 
policy-holders in life insurance companies which have their 
chief office outside the United Kingdom, but which carry on 
business in this country." The report of that committee and 
the hearings which were had led to a serious consideration of 
necessary changes in the law of 1870, and accordingly the 
Government brought in a bill which, after some debate in both 
the House of Commons and the House of Lords, was passed just 
before the close of the session. 

The new act is in many respects a decided innovation in 
British insurance legislation, since for the first time the super- 
visory powers of the Board of Trade are extended to fire and 
accident insurance companies. Employers' liability insurance 
326 



ENGLISH ASSURANCE COMPANIES ACT OF I909 

companies had been brought within the scope of the act of 
1870 by an act passed in 1907. The whole law is now con- 
solidated into a single act, which also includes bond invest- 
ment business, which is defined as "the business of issuing 
bonds or endowment certificates by which the company, in 
return for subscriptions payable at periodical intervals of 
two months or less, contracts to pay the bond holder a sum 
at a future date, and not being life assurance business as here- 
inbefore defined." The act applies to all persons or companies 
not registered under the acts relating to friendly societies 
or trades unions which carry on in the United Kingdom life 
assurance, fire insurance, employers' liability insurance, and 
bond investment business. Every assurance company is re- 
quired to deposit and keep on deposit with the Paymaster- 
General, for and on behalf of the Supreme Court, the sum 
of £20,000. The Paymaster-General is required to invest 
this amount in such securities as are usually accepted by the 
court for the investment of funds placed under its adminis- 
tration as the company may select. The interest earnings, 
of course, are payable to the company making the deposits. 
A company conducting more than one branch of insurance is 
required to make a separate deposit of £20,000 for each class 
of business transacted. 

A distinction is made for the first time in English law 
between insurance and assurance, the former being considered 
to apply to all insurance business other than the life branch, 
which is defined as assurance separate and distinct from every 
other branch of the business. In this sense it is provided that 
"In the case of an assurance company transacting other business 
besides that of assurance or transacting more than one class 
of assurance business, a separate account shall be kept of all 
receipts in respect of the assurance business or of each class 
of assurance business, and the receipts in respect of the as- 
surance business, or, in the case of a company carrying on 
more than one class of assurance business, of each class of 
business, shall be carried to and form a separate assurance 

327 



ENGLISH ASSURANCE COMPANIES ACT OF 1909 

fund with an appropriate name." It is provided, however, that 
nothing in this section shall require the investments of any 
such fund to be kept separate from the investments of any- 
other fund. 

The practice of permitting every assurance company 
to make its report according to the financial year of the date 
of its own selection is continued. On this account the Board 
of Trade returns are never an exact statement of the insurance 
business in the United Kingdom for any given year, although 
the practice of making the business year end on December 31st 
is extending. It would have been a decided improvement in 
the law if all companies had been required to make their business 
years end, as is required of American companies, on December 
31st. 

The provisions which apply to accounts and balance sheets, 
actuarial reports, statements of assurance business, reports 
to shareholders, and audits of accounts do not require par- 
ticular consideration. They conform in all essentials to those of 
the act of 1870. 

Since most of the insurance companies are also subject 
to some of the clauses of the earlier Companies Consolidation 
Act of 1845, and the act of the same title of 1908, the 
new Assurance Companies Act does not repeat the require- 
ments which apply with reference to the provisions of the acts 
just cited. Every assurance company, however, which has 
not registered under the companies acts, or which has not 
incorporated in its deed of settlement section 10 of the Com- 
panies Clauses Consolidation Act of 1845, * s required to keep a 
Shareholders' Address Book, in accordance with the provisions 
of that section, and is further required, on the application 
of any shareholder or policyholder of the company to furnish 
him a copy of such book on payment of a sum not exceed- 
ing 6 pence, for every hundred words required to be copied. 
Provisions referring to the deed of settlement, to the publica- 
tion of authorized, subscribed and paid-up capital, to amalga- 
mation or transfer of business, and to special provisions as 
328 



ENGLISH ASSURANCE COMPANIES ACT OF I909 

to the winding up of assurance companies, are not of parti- 
cular interest nor from long established custom and precedent 
in English insurance or corporation legislation. An important 
provision, however, is section 18, which empowers the court, 
in the case of an assurance company which has been proved 
to be unable to pay its debts, to reduce the amounts of the 
contracts of the company upon such terms and subject 
to such conditions as the court may think just, in place of 
liquidation. 

The penalties for non-compliance with the various pro- 
visions of the act are limited to a sum not exceeding £100, or 
in the case of continuing default, to a sum not exceeding £50 
for every day during which the default continues, and every 
director, manager or secretary, or other officer or agent of the 
company, who is knowingly a party to the default, is made 
liable to a like penalty, which, in continuance of such default 
shall be a ground on which the court may order the liquidation 
of the company in accordance with the Companies Consolida- 
tion Act of 1908. 

The act does not apply to the National Debt Commissioners, 
or the Postmaster-General, acting under the authorities vested 
in them respectively by the Government Annuities Acts of 
1829-88, and the Post Office Savings Bank Acts of 1 861-1908. The 
act also does not apply to a member of Lloyds or to any other 
association of underwriters approved by the Board of Trade, 
which carries on assurance business of any class, provided 
that it complies with the requirements set forth in the eighth 
schedule of the act, which requires that "every underwriter 
shall deposit and keep deposited in such manner as the Board 
of Trade may direct a sum of two thousand pounds. . . . The 
sum so deposited shall, so long as any liability under any policy 
issued by the underwriter remains unsatisfied, be available solely 
to meet claims under such policies." It is further provided 
with reference to this class of business, that the underwriter 
shall furnish every year to the Board of Trade a statement 
-in such form as may be prescribed by the Board showing 

329 



ENGLISH ASSURANCE COMPANIES ACT OF I909 

the extent and character of the life assurance business effected 
by him. 

Passing over the provisions which apply to special classes 
of business, and the Parliamentary definitions of such classes, 
the most important section of the whole act is the 36th, which 
contains various provisions as to collecting societies and indus- 
trial assurance companies. By this section a large amount and 
a considerable proportion of industrial business, chiefly as trans- 
acted by collecting friendly societies, is legalized and raised to 
the status of a legitimate insurance business. The act provides 
in part that: 

"No policy effected before the passing of this Act with a 
collecting society or industrial assurance company shall be 
deemed to be void by reason only that the person effecting 
the policy had not, at the time the policy was effected, an 
insurable interest in the life of the person assured, or that 
the name of the person interested, or for whose benefit or on 
whose account the policy was effected, was not inserted in the 
policy, or that the insurance was not one authorized by the 
Acts relating to friendly societies, if the policy was effected 
by or on account of a person who had at the time a bona fide 
expectation that he would incur expenses in connection with 
the death or funeral of the assured, and if the sum assured is 
not unreasonable for the purpose of covering those expenses, 
and any such policy shall enure for the benefit of the person 
for whose benefit it was effected or his assigns." 

Most of the Parliamentary debate which was had upon 
the act had reference to this particular section, upon which 
there was evidently a strong division of opinion. The whole 
discussion of the act is contained in the debates of the 
House of Lords for July 30 and 31, August 31, and Sep- 
tember 14; and the House of Commons for November 4, 24 
and 25. Among others, Mr. Keir Hardie, the socialist, par- 
ticipated in this debate on several occasions, strongly recom- 
mending the Government to appoint a Royal Commission to 
make an inquiry into the whole subject of industrial insurance, 
previous to the passage of the act. This suggestion, however, 
was successfully opposed as needless by Mr. Winston Churchill, 

33o 



ENGLISH ASSURANCE COMPANIES ACT OF 1909 

the President of the Board of Trade, in immediate charge of 
the bill for the Government. 

The act came into operation on July i, 1910, except sec- 
tion 36, referring to friendly societies and industrial insurance 
companies, which came into operation on its passage. The 
act must be considered an incomplete piece of legislation, due 
partly to the hurried consideration which was given to many 
of its essential provisions during the closing sessions of Par- 
liament. The act fails to give a clear definition of insurable 
interest as applicable to Ordinary life offices, the practice of 
which will remain subject to the antiquated statute known 
as the gambling act. The new act, however, meets the 
most pressing needs of the business of insurance, and ex- 
tends to the Board of Trade all the desired powers for 
adequate supervision as occasion may require. The legisla- 
tion is in conformity to English ideas of a minimum degree 
of paternalism and the largest amount of possible confidence 
in the integrity and ability of corporation management. 
Considering the long experience which has been had with the 
simple but decidedly effective provisions of the act of 1870, 
and the remarkably clean and satisfactory history of life insur- 
ance in England during the last forty years, the new act merely 
gives emphasis to provisions of law which have long been in 
operation and amends the law in the few directions in which 
it was found necessary. The act is in decided contrast to the 
enormous amount of statutory legislation on the subject of 
insurance in the United States and the conflict and confusion 
of law on the subject of insurance in all its branches, although 
in proportion to population the amount of business transacted 
and the corresponding liability incurred is probably greater 
in England than in the United States. 

REFERENCES. 

1. First Report of the Select Committee on Joint Stock Companies. 

Report of the House of Commons, London, March 15, 1844. 

2. Report from the Select Committee on Assurance Associations. 

Report of the House of Commons, London, August 16, 1853. 

331 



ENGLISH ASSURANCE COMPANIES ACT OF I909 

3. Treatise on the Banking and Insurance Business of England, by- 

Carl Schwebemeyer, Berlin, 1857. 

4. Report from the Select Committee on Limited Liability Acts. 

Report of the House of Commons, London, May 28, 1867. 

5. Article on the Origin of Government Insurance in England. In- 

surance Monitor, 1869, p. 968. 

6. Article on Origin of Government Insurance in England. The 

Spectator, issues of January and October, 1870. 

7. Report of the Select Committee on the Companies Acts of 1862- 

1867. Report of the House of Commons, London, July 26, 1877. 

8. State Supervision of Insurance in England, by Emory McClintock, 

American Life Assurance Magazine, Vol. XIV, 1878. 

9. On the 5th and 6th Schedules of the Life Assurance Companies' 

Act of 1870. By David Deuchar, F. I. A., Edinburgh, 1879. 

10. Opinion of George F. King, F. I. A., on The Principles which Should 

be the Guiding Ones in Life Insurance Legislation. London, 
September, 1906. 

11. Report of the House of Lords' Committee on Life Insurance Com- 

panies (194), London, 1906. 

12. Insurance Legislation, British, American and Canadian, by Thos. 

B. Macaulay. Toronto, August 27, 1907. 

13. Notes on the Companies Acts of 1907, by Evans and Cooper. Lon- 

don, 1907, 5th edition. 

14. British Insurance Methods and Government Regulation. Spec- 

tator (v. d.), 1908 and 1909. 

15. Supervision of Insurance Companies from the Actuarial Stand- 

point. By Arthur R. Barrand, F. I. A. Proceedings Inter- 
national Actuarial Congress, 1909. 

16. Parliamentary Debates on the Assurance Companies Act of 1909. 

House of Lords, 1909, Vol. 2, Nos. 38, 57, 59; House of Commons, 
1909, Vol. 12, No. 172, Vol. 13, Nos. 175, 176. 

17. Statutory Rules and Orders, 1910. No 566. Insurance. 

18. The Assurance Companies Act, 1909, with Notes by Maurice 

Hawtrey Truelove, London, 19 10. 

19. The new law regulating Assurance Companies, Being the Act of 

1909, with Notes by Fitzgerald and Quin, London, 1910. 



332 



CHAPTER IX. 
THE LAW OF AVERAGE.* 

There is a great fascination about numbers, which seems to 
defy the understanding. Figures positively affirm or deny every 
conception and condition, leaving little, if any, room for specu- 
lation or uncertainty. Vast aggregations expressed in figures 
appeal powerfully to the human imagination and rates, or 
ratios, in common use aid the understanding and direct the 
judgment, although often erroneous or misleading. On few sub- 
jects is there so little real general knowledge as on the science 
of numbers and yet its utility it so enormous that the world's 
work could not be carried on without it. The uncritical or 
unreasoning use of figures, however, is in truth a very serious 
menace to social and individual well-being, and few educational 
reforms are of more pressing importance than a better under- 
standing of the nature of numbers, their philosophy, their value, 
and their limitations. 

Lord Bacon comprehended a vast amount of sound reason- 
ing in the prediction that men's power over nature would be 
increased a thousand-fold were they to interpret her with the 
humility of truth-seekers, casting aside all prepossessions. 

* This discussion is not intended as a scientific outline of the mathe- 
matical, or even the statistical, theory of average. The object is to 
emphasize the importance of general statistical results as a basis for 
general conduct in the everyday affairs of life. Those who are interested 
in the more scientific aspects of the theory and utility of averages and 
means, should consult the treatise on Insurance by T. E. Young, the 
Primer of Statistics by W. P. and E. M. Elderton, Statistical Methods 
by C. B. Davenport, Theory of Mental and Social Measurements by 
Edward L. Thorndike, Elements of Statistics and An Elementary Manual 
of Statistics, by Arthur L. Bowley. 

333 



THE LAW OF AVERAGE 

Facts, in other words, require to be substituted for miscon- 
ceived theories arising out of prejudice, bias, or desire, and 
facts in the aggregate are represented by the science of numbers, 
In proportion as a basis of fact replaces guesswork opinion, 
certainty is substituted for uncertainty, and past experience 
permits of at least an approximately accurate forecast of the 
future. The appreciation of facts, their value, sequence, and 
relative significance, forms the scientific temperament and the 
function of science. The logical sequence of a given group 
of facts is the law, in the sense in which we speak of the laws 
of nature in contradistinction to the laws of men. Natural 
laws, rightly understood, are the only trustworthy guides for 
the human understanding, for they permit the forecasting of 
future events, and such forecasts are, of necessity, a most im- 
portant function in the deliberate life. 

The Value of Past Experience. 

For we must, of necessity, assume that the future, to a 
considerable degree and extent, will resemble at least the 
immediate past, since otherwise all human effort would be 
nugatory and chaos would result. It is also in the nature of 
things, or a natural law, that the underlying causes are, as a 
rule, outside of our understanding, but the larger the basis of 
past experience, the more likely it is that, conclusions based 
upon such experience will be accurate. This law of nature is 
otherwise expressed as the law of large numbers, which, often 
provides a basis for predicting with approximate accuracy the 
probable occurrence of future events within the normal range 
of human knowledge and experience. No one, without a knowl- 
edge of the facts of past experience, can forecast the future 
state of trade, the growth of cities, the productive activity, or 
any other of the thousand and one problems which confront us 
in our daily life. 

We use the term "probability" in a general way to express 
that which is reasonably certain to occur, and the natural law 
upon which this assumption rests is the law of probability. 

334 



THE LAW OF AVERAGE 

The underlying basis of the law of probability, is, however, the 
law of average, which itself depends upon the law of large num- 
bers. An average, as such, is simply an arithmetical conception, 
which in every-day use is often erroneously derived from numbers 
too small for a correct result. The use of the term average 
is also applied indiscriminately in many cases as a matter of 
pure assumption, in contrast to the scientific method of deter- 
mining the average by calculation from a large number of 
units assembled into an aggregate. The use of the average 
in this sense has a very wide application in connection with 
the solution of a vast number of social and individual problems, 
since it serves as a standard or guide in the forming of our judg- 
ment, which must needs be applied impartially, be the result 
what it may. 

The Meaning of " Average." 

In the common use of the word average, we speak of an 
average weight, an average crop, an average height, an average 
summer, and finally, of the average man or the average life. 
Many of these expressions are extremely vague and but imper- 
fectly understood, and it would be extremely quite for most 
men to clearly define what is meant by an average in the popular 
sense of the word. Clearly the value of the term depends upon 
the nature and numerical extent of the units from which it is 
derived. When based upon a few cases, which may individually 
vary widely, the resulting average may be decidedly erroneous. 
The personal idea of an average summer, or an average winter, 
may, for illustration, rest solely upon a mere matter of personal 
experience, and not upon carefully collected and critically 
analyzed meteorological observations extending over a long 
period of years. The expression "average man"may rest upon 
complete ignorance as to the most important anthropometric 
proportions, or the aggregate results of a sufficient number 
of individual lives, carefully observed for a period of years. 
The term " average life time" is often assumed to mean the 
individual expectation, or the number of years which a person 
may expect to live subsequent to a given year which has been 

335 



THE LAW OF AVERAGE 

attained, while in fact the expression means the equal chance 
of a person to live or not to live a given period of years, which 
is, of course, a very different matter. 

More accurate is the use of the average in mechanical 
employments, when an engineer speaks of the average pressure 
per square inch, or the average work which can be done by an 
engine per unit, or when the railroad engineer speaks of the 
average speed of a train, or the average load per car. These 
are all measurable quantities, readily within the understanding 
of the man who makes use of the term. Still more clear to the 
human mind is the use of the term in connection with matters 
of business and finance, when we speak of the average rate of 
interest earned by investments, or the average profit realized 
in bargains or sales, or the average rate of loss which must be 
assumed as an inherent condition of every legitimate business 
venture. 

The Proper Use of " Average." 

The most erroneous use of the average is when the term is 
employed to forecast individual occurrences, or to verify indi- 
vidual predictions of individual events, which, if realized at 
all under such conditions, would be a mere matter of true acci- 
dent, or pure chance. It is, in fact, the very opposite of the 
function of the average to forecast any particular event, or the 
occurrence of any particular contingency. The proper use of the 
term is limited to the forecasting of normal events, in the order 
of normal frequency. While , for illustration, it is not at all 
difficult to forecast with reasonable accuracy the population of 
a country as a whole for a subsequent decade, or even much 
longer, provided no substantial change takes place in the essen- 
tial circumstances which condition its life and growth, it is 
quite difficult to forecast, with even approximate accuracy, 
the growth of any particular community with a small population, 
or say less than twenty thousand. When cities or towns are of 
very considerable size, however, such as New York or Philadel- 
phia, a forecast may be made of the population a decade hence, 
which in all probability will be closely verified by the actual 
336 



THE LAW OF AVERAGE 

enumeration. The theory, of course, is based upon the average 
rate of increase during a previous period of sufficient length, say 
a decade, or quarter century, and it rests upon the assumption 
that the normal conditions as then prevailing and governing 
the rate of increase by an excess of births over deaths, and 
an excess of immigration over emigration, will continue as in 
the past. When important changes occur, the prediction, 
of course, comes to naught, but in large aggregates the changes 
would have to be very powerful indeed, or equivalent to a catas- 
trophe or revolution, to produce a very substantial deviation 
from the rate of growth in former years. Even an earthquake 
such as affected the city of San Francisco, may not materially 
change the existing numbers of the population after a sufficient 
period of time has elapsed for a re-assembling of the former 
units and a return to normal conditions of life and growth. 

In trade it is practically the same, and given a knowledge 
such as we have, say of the total amount of foreign imports 
during a period of years, it is with practical certainty that we 
can forecast, within reasonable limitations, the approximate 
amount of goods to be imported during a subsequent period of 
years. While this is true for trade in the aggregate, it would 
be very hazardous, however, to forecast the probable amount of 
imports of any given article, since groups of the units composing 
the aggregate are liable to a much greater rate of fluctuation 
than all of the units combined. Here again it is assumed, of 
necessity, that conditions governing the import trade will con- 
tinue uninterruptedly in the future as they have in the past, 
since, for illustration, a radical change in the tariff, or even a 
seriously threatened changein the rates of duty upon the differ- 
ent articles, or goods, would tend to disturb, and possibly set 
at naught, all predictions, however conservatively arrived at. 

Forecasting the Future. 
Equally imported is the use of the average in forecasting the 
future number of foreign immigrants, which may be estimated 
with reasonable accuracy upon the basis of recent returns, with a 

337 



THE LAW OF AVERAGE 

due consideration of the fluctuations in the rate, as observed 
in the past. Manifestly a fundamental distinction requires to 
be made between averages derived from gradually increasing 
aggregates, resulting from an increasing population on the one 
hand and an increasing productive national power on the other, 
and aggregates which conform to the rhythm of motion as 
ascending and descending curves, of which the rate of immi- 
gration is a very useful illustration. It is evident that great 
care is required in the use of averages derived from fluctuating 
aggregates and that predictions are less likely to conform to 
subsequent experience unless there is adequate knowledge 
and a clear understanding of all the facts which enter into the 
problem. Predictions as to the future number of immigrants 
depend, of course, primarily upon the assumption that there 
will be no radical change in existing national legislation, or, 
in other words, that no laws will be passed under which certain 
nationalities are, wholly, or in part, excluded from entry at our 
ports. An exclusion law, however, which would only affect certain 
nationalities which do not contribute numerically to any con- 
siderable extent to our present immigration, would practically 
leave predictions unchanged. 

What has been said depends, of course, upon the scientific 
assumption that "the same set of causes is always accompanied 
by the same effect," or that "the future will be like our expe- 
rience of the past, which is the sole condition under which we 
can predict what is about to happen, and so guide our conduct." 
These are the words of Karl Pearson, whose Grammar of Science 
should be the text-book for all who desire to replace guesswork 
opinion by a rational, independent and impartial method of 
thinking. For, as Pearson has well said, "in the struggle 
for existence man has won his dictatorship over other forms 
of life by his power of foreseeing the events which flow from 
antecedent causes — not only by his memory of past experience, 
but by his power of codifying natural law, that is, by his power 
of generalizing experiences in scientific statements." It is in 
this sense that we speak of natural laws which enable us to know 
338 



THE LAW OP AVERAGE 

how phenomena take place, but do not explain the why or 
wherefore. With these the man of science has no concern, since 
they fall within the domain of the unknowable, or what is out- 
side the scope of the human understanding. Men's minds are 
great or small in proportion as they possess the power of a broad 
generalization, by which they are enabled to arrive at a comprehen- 
sive grasp of the facts of past experience, upon which they can fore- 
cast with approximate accuracy the occurrence of future events. 
The law of the individual life is one of inherent uncertainty, 
which results from the nature of things. It is a truism that 
every man is unlike every other, and this is equally so of the 
success which is attained in the various directions in which 
men exercise their abilities. If, however, all the units are 
grouped, there is a degree of average success which cannot be 
denned in numbers, but which is fairly well comprehended 
without them. The struggle of the individual, however, is rarely 
for an average success in commerce, industry, science, or art, 
but rather for exceptional success, or a decided deviation from 
the preponderating number out of which the average is 
derived. 

Practical Uses of " Averages." 

While there is a great deal of uniformity in any large number 
of events, be they what they may, whether it be the annual 
harvest of corn or wheat, the number of railway casualties to 
passengers, employees, or others, the number of letters sent 
through the mails, or the number of telegrams sent over the 
wires, the variation in the units which go to make up these 
masses is always very great, and the degree of variation is 
of as much practical importance as the average which is more 
conveniently recalled to memory. The average price of hay 
per ton throughout the United States during 1906 was $10.37, 
but the average price for the state of Minnesota was as low 
as $5.50. and for the state of Rhode Island as high as $17.40. 
Not quite as great was the variation in the average yield of 
hay per acre, which was 1.35 tons for the United States, but as 
low as 0.78 of a ton in Missouri, and as high as 4.0 tons 

339 



THE LAW OF AVERAGE 

in Utah. For both of these items, however, the averages 
would vary considerably for different years, and while, for 
illustration, the average yield of hay per acre in Utah was 
4.0 tons in 1906, it was as low as 2.45 tons in 1901. Evidently 
any forecast of the future must take into consideration the 
fluctuation in averages for small groups, which again go to 
make up the averages for large aggregates. We have to con- 
sider the elements of time and place the moment we make 
a more narrow application of the law of average to forecast 
the future for a more limited range of conditions or events. 

For illustration, if any one were authorized to contract 
for the purchase of a large number of horses, let us say ten 
thousand, to supply an army, or meet the needs of a large 
corporation, it would be reasonable to take into consideration 
the average price for the United States, which during 1906, 
was $93.50. Since, however, the variation in the average 
price was between $41 in Arizona and $126 in South Carolina, 
the local market would have to be seriously considered to make 
the business venture a success. In examining the data of the 
subject it will be found that the largest number of horses was 
in the states of Illinois, Iowa, Kansas, and Texas, where the 
respective average prices were $109, $100, $89, and $62. If, 
however, the place where the horses were required was in the 
east, let us say New York, the local market price of $111 would 
probably be cheaper than the more remote and lower prices, 
which would be increased by the cost of long transportation. Even 
then, however, the average derived from very large numbers, 
or nearly twenty million horses throughout the country, would 
be fairly applicable to the problem and if the mode of greatest 
frequency of price were considered, it would be safe to contract 
to supply upon the estimated basis of about $100. The data, 
however, would be much more determining to the government, 
or the corporation, than to the contractor, who would be more 
free to make his choice and to enter into individual bargaining 
not subject to the law of average, provided the number of units 
to be supplied was of reasonable proportion. 

340 



the law of average 

The Element of Chance. 

The man of business, in other words, must forecast the 
needs of the future from day to day and year to year, even if 
only a moderate degree of success is to result from his efforts. 
There is no reliance to be placed upon luck in life, or chance, 
in the sense as the terms are generally used, but there are 
exceptional occurrences, due to causes which are outside the 
operation of the law of average. Good luck and ill luck, or 
the equivalent of exceptional success or exceptional failure, 
are inherent in the nature of things the moment the few are 
considered which form the decided variations from the average 
or the mode which is a more scientific and better representation 
of the greatest frequency of normal occurrences. Those whose 
conduct is influenced by exceptional occurrences, or the mere 
accidental fulfillment of arbitrary predictions, overlook a 
thousand negative results by conforming their conduct to the 
one accidental fulfillment of a chance prediction. 

The inclination to rely upon chance is partly in conformity 
to the well-known principle that negative events have a far less 
firm and persistent hold upon the mind than positive events, 
which explains the still persistent belief of those who believe 
in weather folklore and in local weather signs, and who would 
connect the advent of the seasons, or their degree of severity, 
with animals and birds, insects and plants, the sun, the moon, 
and the stars. It will usually be found that popular weather 
interpretations, or forecasts, are easily disproved by accurate 
observations extending over a period of years, but all evidence 
of this character notwithstanding, those who will not see and 
will not understand persist in their course of ill-reasoning and 
guess-work opinion. Conduct which is made to rest upon 
such a basis must prove disappointing in the large majority of 
cases. From this point of view also all proverbial philosophy 
is, as a rule, misleading, and more certain to cause disaster than 
to bring success. It is not claimed that any amount of accu- 
mulated experience will ever enable us to forecast the future 
with absolute accuracy or certainty, but, other things equal, 

34i 



THE LAW OF AVERAGE 

the man who has learned to conform his conduct to the law 
of average, and who has amplified his knowledge by a study 
of the degree of normal variation and frequency, is more certain 
of success in business life than the one whose conduct is made 
to rest upon belief in luck and good fortune and whose plans 
change with the weather and whose purposes change with 
the occurrence of events. While the liability to error in judg- 
ment is enormous in the consideration of individual instances 
or events, the liability is reduced to a minimum when judg- 
ment is based upon the law of average, or the degree of greatest 
frequency, as determined by large numbers, which eliminate 
the fluctuations due to accidental causes. 

The Law of Variation. 

Recalling that the science of averages is, in fact, the science 
of large numbers, the resulting function must of necessity 
represent a large degree of variety in the individual units 
which compose it. In fact, the average as such, may not ex- 
actly correspond to any one of the many individual units, or 
groups, from which it has been derived. Thus, for illustration, 
the average height of a group of say, one thousand men, may 
be five feet, eight and one-quarter inches, but few if any one 
of the many may be exactly of the degree of height representing 
the average. A few of the men in the group may be as small 
as dwarfs, while a few at the other extreme may be of the height 
of giants, but the preponderating majority will be found to be 
of, or about, the height centering around the average of five 
feet, eight and one-quarter inches. If upon this exact average a 
tailor were to furnish clothing for a group of men by suits of 
the average dimensions, including, of course, other factors 
which need not here be considered, the results would conform 
to the needs of only a small group and be of no value whatever 
to a considerable proportion who would deviate too decidedly 
from the average. 

In other words, to overlook the degree of variation is as 
much an error as to base judgment exclusively on exceptional 
342 



THE LAW OF AVERAGE 

cases. To arrive at an accurate result a tailor must con- 
sider the degree of variation in different groups and must ascer- 
tain the proportion of men of different degrees of height, which 
would produce a result almost in exact conformity to the needs 
of the group under consideration. The practical application of 
this theory we meet with in everyday life, in any store which 
supplies the needs, not so much of the true average type 
of man as of the preponderating number grouped about the 
average. 

The reference to dwarfs and giants, as decided variations 
from the height of men in the mass, will serve as an illustration 
of exceptional success and exceptional failure in business or 
private life. It is a most serious error on the part of the 
periodical press to over-rate the value of exceptional success 
and to hold out exceptional types as ideals, to which average 
conduct should conform. It is utterly out of the question 
and in contradiction to the law of probability, that more 
than a small group of men can attain exceptional success, riches, 
power, or fame, for a large group are sure to fall below and prove 
decided failures. It is because of this error in judgment that 
so large a number of men over-rate their ability and their 
inherent power to attain to a degree of success f^r above 
the normal which pertains to the mass of mankind, and 
that the proportion of complete failures is so large, the evi- 
dence of which we find in the increasing number of suicides, 
criminals and insane. A rational understanding of the limi- 
tations under which human life in the mass can be carried 
on, is one of the most certain safe-guards to a sane and 
rational existence. In the nature of things this must be so, 
and in the nature of things it can never be otherwise, all 
of the speculations of political and social dreamers to the con- 
trary notwithstanding. No more will there ever come a time 
when all men will be of the same height, or weight, or of the 
same degree of physical strength, than there will ever come 
a time when they will be of the same degree of mental, moral 
and emotional development. There will always be a mass in 

343 



THE LAW OF AVERAGE 

which the units will fairly conform to one another, though each 
will be more or less slightly different from any of the rest, while 
there always will be a small group of persons of exceptional 
ability at the one extreme, and a greater group of men of 
exceptional inability at the other. 

The Law of Large Numbers. 
This is the law of average, the law of large numbers, the 
law of nature, which governs the life of men, and things, and 
events, and all that there is in the world, and all that there 
ever will be. If we had the measurements of all the stars 
in the heavens we would find them to conform to the law of 
average, grouping in dimensions around the mode of greatest 
frequency, with a curve tapering down on the one side to the 
smallest dimensions, and on the other ascending to the largest. 
If we could measure every animal, every plant, every leaf, 
even down to the size of every grain of corn, we would find the 
same conformity to the law of average, and the law of greatest 
frequency, and the law of variation, as we find it in the life of 
men. But for this salutary state of things, human existence 
would be chaos and human life, as we understand it, would 
be impossible. But for the law of average, or the law of large 
numbers, we could not forecast the future with any reasonable 
degree of accuracy, and without such a forecast all our efforts 
would be nugatory and all our aims and aspirations would 
come to naught. 

Futility of Gambling and Speculation. 
In clear contrast to the natural law of average, or normal 
frequency in the occurrence of events, stands the theory of 
pure chance, best illustrated in gambling, betting, lotteries, 
and stock exchange speculations. This difference was clearly 
perceived among the Romans who distinguished between For- 
tuna and Fatum, or fortune and fate, the former being acts 
outside of established laws, or occurrences of mere caprice, while 
the latter implies predetermined events in conformity to the 

344 



THE LAW OF AVERAGE 

science of average. It would be unwise, of course, to ignore the 
enormous importance of matters of pure chance in daily life, or, 
as it has beautifully been expressed in the words, "O, Lord, on 
what a slender thread hang everlasting things! " The thread 
of the individual life may at any moment be broken by any one 
of a thousand chances, which are lost in the aggregate, but em- 
phasize the true course of nature, "How careful of the type 
she seems, how careless of the single life." There, however, 
is no premeditation, or fate, in occurrences of chance, but they 
result from the nature of things, which it is the object of human 
knowledge, as far as possible, to foresee and set aside. It is 
the better part of wisdom to rely upon past experience and 
observed events establishing the law of frequency and recur- 
rence, than to trust to chance, or luck, as determining factors 
in the affairs of life. The gambler lives in opposition to this 
theory of a rational adaptation to things as they are, and as 
they ever will be, if civilization is to endure and the progress 
of mankind is to continue. The gambler takes his chance 
with a practical certainty that he will lose his all in a desperate 
effort to gain the all of others, and he arrives at his conclusions 
by an ill-reasoned hope for the most improbable occurrence 
of a specific event. In gambling the chance of loss amounts 
to practically a certainty, partly because in the nature of 
things, the bank, or house, relies on the science of averages, 
while the individual gambler relies on the theory of probability, 
or pure chance. This is true of stock exchange speculation, 
in which millions are sunk by the many in the vain endeavor 
to secure large gains from the few who operate in conformity 
to the science of average and in opposition to the principle of 
pure chance which governs the individual speculator or in- 
vestor. In other words, certainty of results is enormously 
in favor of those who practically take no chance whatever, 
while the risk of loss is out of all proportion to the probability 
of gain on the part of those who rely upon an accidental occur- 
rence which may bring them exceptional results. 

345 



the law of average 

Theory of Probability. 
The theory of probability has its scientific explanation 
and use, but it has no practical value to the individual in his 
efforts to forecast with certainty the occurrence of a specific 
event. The theory of probability lies at the root of the vast 
business of insurance in all its branches, and being derived 
from the science of average it meets the conditions of this 
business in the most admirable manner by equalizing losses and 
effecting a re-distribution of results. While it is impossible to 
forecast the probable duration of a single life, it is not at all 
difficult to predict with approximate certainty the average 
duration of a sufficient number of lives. Accuracy in the veri- 
fication of scientific prediction increases with increasing numbers, 
so that, other things equal, the security is greatest where the 
number of units is largest. The more extensive the field of 
operations, the more certain it is that accidental variations 
from the normal will balance themselves, and that the general 
result will conform to the expected or predicted outcome. As 
civilization advances, however, and with the progress of sanitary 
and medical science, the tendency of the human death rate will 
be to decline and of longevity to increase, so that an ever larger 
proportion of those who are born may live to the highest attain- 
able ages, from the biblical three score and ten to a possible 
maximum beyond the century mark. 

Law of Average Applied to Problems of Mortality. 
Largely because of an increasing familiarity with the law 
of average, as applied to problems of human mortality, modern 
science has been able to determine the underlying conditions 
destructive to health and life, which by degrees have been 
removed or mitigated until very substantial fluctuations in 
the death rate are becoming less and less frequent. It is 
to-day extremely improbable that there will ever again occur 
cholera epidemics such as brought desolation and sorrow to 
tens of thousands of homes in 1849, or yellow fever epidemics 
such as brought ruin and disaster to the south in 1878. Occur- 
346 






THE LAW OF AVERAGE 

rences like these raised the death rate of New York to 46.7 
per thousand, and of New Orleans to 48.9 per thousand, during 
the years mentioned, a deviation from the normal which has 
not been experienced since. A knowledge of the facts in question 
was first necessary before remedial measures could be taken and 
the lessons of life insurance experience and sanitary science, 
more, perhaps, than any other facts of human experience, em- 
phasize the enormous value of a scientific study of the past 
and the rigid enforcement of rules of social conduct based upon 
past experience. 

American mortality experience during recent years also em- 
phasizes the truth of this conclusion. While the average mortality 
from all causes in the registration area was 16.3 per thousand 
during the five years ending with 1907, it was 15.4 per thousand 
during 1908. The lowest death rate during the period of six 
years was 15.4 per thousand, and the highest 16.7, which con- 
forms closely to the average during the five years ending with 
1907, and also to the rate prevailing during 1904 and 1908. A 
similar degree of regularity is to be observed in the mortality 
records of other countries with conditions similar to those met 
with in the United States. If the death rate is somewhat higher 
the degree of fluctuation is somewhat greater, and the degree 
of variation will probably be reduced as the rate is lowered 
by slow degrees as the result of sanitary and social progress. 

What is true of the mortality from all causes is equally 
true of the mortality from principal causes, except diseases of 
an acute or infectious character, such as smallpox, la grippe, 
diphtheria, measles, etc. It is possible, upon the basis of large 
numbers, or the science of average, to predict with approx- 
imate certainty the proportion of male births to female 
births, which, for Massachusetts, for illustration, is in the ratio 
of 105 males to every 100 of females. It is possible to pre- 
dict that, other things equal, the mortality of females will 
be below the mortality of males at all ages, and that a larger 
number of women will survive to old age than of men. It is 
possible to predict that the proportion of deaths from con- 

347 



THE LAW OF AVERAGE 

sumption will be approximately 9.6 per cent, of the mortality 
from all causes, while the proportion of deaths from diseases 
of the heart will be 10.5 per cent., and of diseases of the nervous 
system 10.2 per cent. It is possible to predict that the rate 
at which suicides will occur among the population of large 
cities will be approximately two per ten thousand of popu- 
lation, and that in sixty-five of our large American cities during 
the present year approximately 3,000 suicides will occur. It 
is possible to forecast the number of coal mining accidents, 
which amount to about 2,400 per annum and occur at the rate 
of 3.4 per thousand of men employed in coal mining opera- 
tions. It is possible to forecast the number of railway casu- 
alties to employees, which during 19 10 will probably number 
4,000, or occur at the rate of 2.5 per thousand of men employed. 
These illustrations could be multiplied and made to include 
practically every condition affecting the happiness and welfare 
of mankind, and in proportion as the value and significance 
of collective phenomena is duly appreciated, and as the lessons 
derived from the science of average are applied to the solution 
of social problems, will the social progress of mankind be rapid, 
or the reverse. 

The Inductive Method of Reasoning. 

"Man," said Lord Bacon, "being the servant and inter- 
preter of nature, can do and understand so much, and so much 
only as he has observed in fact, or in thought, of the course 
of nature: beyond this he neither knows anything, nor can do 
anything." Evidently the course towards a right understanding 
of nature is to comprehend as clearly and vividly as possible 
the lesson taught by collective phenomena, rather than by ex- 
ceptional occurrences, or exceptional results. It is better for 
the average man, or more accurately, the mass of mankind, 
to conform their conduct to the teachings of past experience, 
and thus forecast with approximate accuracy the future, than 
to place any considerable degree of hope or reliance upon pure 
chance, which is practically certain to bring disappointment, 

348 



THE LAW OF AVERAGE 

disaster and ruin. I once more may quote Lord Bacon's words 
that "Such is the way of all superstition, whether in astrology, 
dreams, omens, divine judgments, or the like; wherein men 
having to deal in such vanities mark the events when they 
are fulfilled, but where they fail, although this happens much 
oftener, neglect and pass them by." Instead of being led by 
chance occurrences, the intelligent man should dispassionately 
consider the facts and circumstances and realize that the prob- 
ability of a recurrence of exceptional events, or luck, or good 
fortune, is not at all likely to take place. In other words, it 
is our duty to make every effort to grasp clearly and vividly 
the facts of human experience, and apply, as far as prac- 
ticable, the lessons of such experience to our own conduct and 
towards the solution of such problems as we may be called 
upon to consider. Only that can really be called an edu- 
cation which leads to a discipline of the mind and real mental 
exertion, to bring out the best that is in us, in place of a 
mediocre result far below the attainable average. Our judg- 
ment requires to be made to conform to observed experience 
in place of guesswork opinion, with a distinct inclination towards 
inquiry and mature reflection, in place of hasty and arbitrary 
action, which is merely a matter of caprice. When this rule of 
conduct is observed, we shall hear less of games of chance, of 
manias and speculations, for the inherent absurdity of reliance 
upon the most improbable of events, or combination of events, 
will be made clear to us. We shall no longer stultify our in- 
telligence by the notion that a mania for gambling and spec- 
ulation, or a betting upon uncertainties, is a trait inherent in 
the nature of men, and perhaps a commendable pastime, but 
we shall understand that such conceptions of conduct result 
from ignorance of natural laws which govern human life and 
human actions in the mass the same as the movements of the 
most distant stars. In brief, we shall find it more safe to rely 
upon the law of average, as expressed in results of past expe- 
rience, or the inherent order and degree of frequency of things 
and events, and by doing so increase our personal security 

349 



THE LAW OP AVERAGE 

against disaster on the one hand, and our peace, happiness, and 
prosperity on the other. The more perfect our knowledge in 
this respect, the more certain that our course in life, though 
perhaps less eventful and adventurous, will be more productive 
of good results to ourselves and to others, while throughout 
social and commercial life there will be increased stability, 
which, other things equal, furnishes the largest degree of happi- 
ness and well-being to the largest number. 

LIST OF REFERENCES. 

i. De Morgan, Augustus; Essay on Probabilities, London, 1838. 

2. Quetelet, M. A.; Popular Instruction on the Calculation of Prob- 

abilities, London, 1849. 

3. Clark, Saml.; The Laws of Chance, London, 1843. 

4. Rouse, Wm.; The Doctrine of Chances or the Theory of Gaming, 

London, n. d. 

5. Emery, Henry C. ; Speculation on the Stock and Produce Exchanges 

of the U. S., New York, 1896. 

6. Reflections upon what the world commonly calls Good Luck and 

111 Luck with regard to Lotteries, 2nd Ed., London, n. d. 

7. The Gambling World; Anon., N. Y., 1898. 

8. Ashton, John; The History of Gambling in England, London and 

N. Y., 1889. 

9. Green, J. H.; Exposition of the Arts and Mysteries of Gambling, 

Phila., 1848. 
10. Jevons, Stanley; Principles of Science, 2 vols., London, 1871. 
n. Gryzanovski, E. C. F. ; On Collective Phenomena, pub. by the 

American Economic Association, 1906. 

12. History, Theory and Technique of Statistics, by August Meitzen; 

translated by Roland P. Faulkner, Phila., 1891. 

13. Galton, Francis; Inquiry into Human Faculty and its Develop- 

ment, 2nd Ed., Everyman's Library, n. d., p. 194. 



350 



LIST OF AUTHORS 



Ames, James B., 149. 15° 
Ashbumer, Walter, 95, 96. 

Bacon, Francis, 45, 333, 348. 

Bagehot, Walter, 36. 

Barbon, Dr., 155. 

Beawes, Wyndham, 107. 

Beckmann, John, 98, 113. 

Benedict, Erastus C, 149- 

Benjamin, R. M., 140. 

Blackstone, Sir William, 144, 152, 153. 

Blodget, Lorin, 17. 

Blunt, Joseph, 108. 

Blydenburgh, Jeremiah W., 94, 144. 

Bowley, Arthur L., 333. 

Bradley, Joseph P., 149. 

Brodie, Alexander, 125. 

Bryce, James, 265. 

Bunyon, Charles J., 163. 

Caines, George, 151, 190. 
Carey, John, 105. 
Cartwright, C. W., 198. 
Cassel, G., 292. 
Churchill, Winston, 330. 
Clark, John B., 44. 
Clarke, Francis G., 108. 
Cleveland, F. A., 308. 
Cleveland, Grover, 292. 
Colbert, Jean Baptiste, 122. 
Compte, Auguste, 45. 
Cooley, Thomas M., 291. 
Copson, John., 159 
Cox, Robert Lynn, 289. 
Creighton, Charles, 15. 
Crouse, Benjamin F., 300. 
Cunningham, Thomas, 113. 
Currie, Gilbert, 40, 41. 

Dana, R. H., 167. 

Darby, William, 21. 

Davies, William G., 29. 

Davenport, C. B., 333. 

Davis, John P., 200. 

Deane, Silas, 128. 

Demosthenes, 95. 

Drake, Daniel, 16, 17. 

Dryden, John F., 14, 42, 45, 179, 202, 

211, 213, 214, 264, 288, 300, 307. 
Duckworth, Lawrence, 97. 



Duer, John, 102, 121. 
Duffield, Edward D., 273. 
Dunglison, Robley, 17. 
Dymond, Jonathan, 8. 

Elderton, Ethel M., 333. 
Ehrenberg, Dr. Victor, 239. 
Ely, Richard T., 78. 
Emminghaus, Dr. Arwed, 239. 

Fenner, E. D., 18. 

Fetter, Frank A., 73. 

Finch, John A., 306. 

Fisher, Irving, 51, 80. 

Flanders, Henry, 92, 150. 

Ford, Worthington C, 177. 

Fowler, John A., 144, 157, 162, 166, 178 

Franklin, Benjamin, 170. 

Gordon, William, 176. 
Gould, B. A., 10, 21. 
Gow, William, 150. 
Graham, Wm. J., 309, 310. 
Griggs, John W., 27. 
Gruner, Ernst, 228. 
Guthrie, William, 21. 

Hadley, Arthur T., 70. 
Hahn, Dr. Ferdinand, 230. 
Hall, John E., 95. 
Hamilton, Alexander, 132, 211. 
Hamilton, James, 170. 
Hamilton, Robert, 124. 
Hardie, Keir, 330. 
Hardy, E. R., 98, 121, 175, 189. 
Haviland, Alfred, 21. 
Hepburn, A. Barton, 38. 
Hine, C, C, 27. 
Hobson, J. A., 51, 84. 
Hoffman, Frederick L., 18. 
Holmes, Jr., Oliver W., 215, 
Holt, Henry, 83. 
Huet, Bishop, 122. 
Hughes, Charles, 265. 

Johnston, H. H., 22. 

209, Karup, Johannes, 239. 

Kent, James, 132, 192, 193, 194, 203, 204, 

205. 

351 






LIST OF AUTHORS 



King, George, 12. 
Knapp, J. L., 206. 

Lee, Arthur, 128. 

Lewis, Joseph J., 278. 

Lewis, Governor Morgan, 192. 

Lindabury, Richard V., 179, 210, 273. 

Logan, James, 158. 

Macdonald, William, 174. 
Mackay, Charles 20. 
Macleod, Henry D., 5, 32, 68. 
Macmillan, Michael, 61. 
Magens, Nicholas, 109. 
Malynes, Gerard, 100. 
Mansfield, Lord, 112, 113, 117, 164 
Marion, Joseph, 169, 170. 
Marshall, John, 209. 
Marshall, Samuel, 25, 64, 93. 
Martin, Frederick, 144, 148. 
Mayo-Smith, Richmond, 280. 
McCulloch, J. R., 34, 271. 
Mill, John Stuart, 41, 56, 272. 
Millar, John, 84, 123, 154, 163. 
Molloy, Charles, 97. 
Moore, John B., 129. 
Moore, John H., 108. 
Morrell, Edward, 209. 
Morris, Corbyn, 106, 107. 

Newsholme, Arthur, 12. 

Park, James Allan, 25, 98, 119, 121, 

123. 
Patten, John, 208. 
Pearson, Karl, 11, 338. 
Peel, Robert, 283. 
Penn, William, 158. 
Peto, S. Morton, 272. 
Phillips, Willard, 203. 
Pickering, Charles, 21. 
Pitt, William, 271, 283. 
Plass, Johann Friedrich, 146. 
Piatt, Thomas C, 208. 
Pocock, Lewis, 43. 
Postlethwayt, Malachy, no, 162. 
Price, Richard, 44. 
Puflendorf, Baron, 103. 

Quetelet, Adolphe, 9, 21, 350. 

Rawle, Francis, 103, 159. 
Reatz, 146. 



Relton, Francis B., 157, 158. 
Richards, George, 145, 202. 
Ripley, William Z., 24. 
Rogers, Dr. O. H., 10. 
Rolt, Richard, 107. 
Roscher, William, 7, 58, 59. 

Saunders, Joseph, 160. 
Scattergood, J. Henry, 118. 
Schouler, James, 170. 
Seligman, Edwin R. A., 74, 302. 
Seguin, Dr. Edward C, n. 
Shattuck, Lemuel, 16. 
Shee, Walter, 160. 
Smith, Adam, 52. 
Smith, John, 170. 
Smith, Samuel B., 288. 
Smith, Toulmin, 33. 
Smith, William, 173. 
Spencer, Herbert, 45, 216. 
Sumner, Charles, 282. 
Sumner, William G., 40. 

Thompson, Robert E., 57. 
Thorndike, Edward L., 333. 
Turner, Sharon, 33. 

Vance, William R., 99, 113. 

Walford, Cornelius, 33, 91, 95, 97, 100, 102, 

156. 
Walker, Francis A., 59. 
Wambaugh, Eugene, 152, 169. 
Wayland, Francis, 8. 
Webster, Daniel, 283. 
Wells, David A., 291, 292, 293. 
Weskett, John, 114, 115, 116, 118, 120, 

129, 145. 
Westergaard, Harold, 40. 
Westermarck, B. E., 40. 
Wharton, Thomas, 160. 
Willett, Allan H., 6, 32, 50, 78, 87. 
Wilson, James, 211. 
Wolford, George, 27. 
Woodruff, Maj. Charles E., 24. 
Wright, Elizur, 42, 285. 
Wynne, James, 17. 

Young, Thomas E., 9, 10, 333 = 

Zartman, Lester W., 288. 
Zouch, Richard, 10 1. 



352 



INDEX 



Abuses in insurance, effect of, 

147- 

Accidents in mining, 23; on 
railways, 37. 

Accountancy, insurance and, 66. 

Act 6 George I, 122, 156, 160, 
173; 19 George II, 112, 118, 
152, 164, 166-168; of 1746, 
161; of Congress on insur- 
ance, first, 190. 

Acts of 14 George III, 152; of 
4th and 5th William and 
Mary, 153. 

Actuarial responsibility for re- 
serve calculation, 250. 

Actuarial Science, 9, 10. 

Administrative and judicial 
functions of German sup- 
ervising department, 261. 

Administrative law of insurance, 
German, 231. 

Admiralty jurisdiction, colonial, 
149. 

Admiralty law, insurance a 
branch of, 148. 

Admiralty practice, American, 
148. 

Adventure, merchant, and insur- 
ance, 67. 

Adverse legislation, effect of, 
148. 

Advertisements, compulsory re- 
quirement of, 197; early 
insurance, 104, 155, 159, 
185, 187. 

Advisory Council to German Im- 
perial Insurance Depart- 
ment, 238, 239. 

Agencies, necessity of, 30. 



Agents, praise of, 42. 

Agreements of underwriters 
before the Revolution, 177. 

Alabama Claims, 120. 

Alba, Duke of, insurance pro- 
hibited by, 148. 

America, first mentioned in Eng- 
lish insurance law, 162; 
beginnings of insurance in, 
104. 

Amicable Contributionship, 155, 
171. 

Amory vs. Gilman, 166. 

Ancient and modern law, in- 
terdependence of, 205. 

Ancient law, principles of, 205. 

Annual reports of German sup- 
ervising departments, 253. 

Annual statements required in 
Germany, 249. 

Annuity, definition of, 68; pro- 
posals before the Conti- 
nental Congress, 176. 

Anthropology, 20. 

Anthropometry, 10, 20. 

Appraisal of real estate, Ger- 
man method of, 256. 

Arbitrations, international, insur- 
ance in, 128. 

Arguments on Federal super- 
vision, by John F. Dryden, 
212; on uniform law and 
legislation on insurance, by 
John F. Dryden, 214. 

Assets of American life insurance 
companies, 37, 80. 

Association of Life Insurance 
Presidents, 289. 

Assurance and insurance, hi. 



353 



Assurance Companies Act of 
1909, 326. 

Austria, life insurance supervi- 
sion in, 228. 

Average, definition of, 335; law 
°ft 77» 333! principles of, 
91; doctrine of 97; proper 
use of, 336; practical use 
of, 339; lifetime, 335. 

Banking problems, 37, 38. 

Bibliography of insurance, 43 ; 
of insurance as a science, 
46-49 ; of insurance econom- 
ics, 89; of insurance as an 
element of early commerce, 
133; of the origin and 
growth of law and legisla- 
tion on insurance, 216; of 
government supervision of 
insurance in Germany, 266; 
of insurance taxation, 311; 
of English insurance legis- 
lation, 331; of law of aver- 
age, 350. 

Bills of exchange, 113. 

Biological science, 10. 

Board of Insurance Commis- 
sioners, Mass., 198. 

Board of Trade, supervision of 
insurance by the, 326. 

Boiler inspections, value of, 73. 

Bond or endowment certificates, 

327- 
Boston Fire and Marine, 187, 

196. 
Boston Marine Ins. Co., 189. 
Boston Tontine Association, 

180. 
Bottomry bonds, 92, 94, 124, 143, 

144, 189. 
Bottomry loans, 112, 114. 
Bubble Act, 156, 160. 



Burgundy, Edict of Count of, 147. 

Business, relation of insurance to, 
64, 80, 94; morality, prin- 
ciples of, 109; of insurance, 
the, 94; protection, by in- 
surance, 79. 

California, insurance supervi- 
sion in, 199. 

Canon law of usury, 96. 

Capital, accumulation of, by in- 
surance, 36, 78, 79. 

Capture, insurance against, 118, 
163, 189. 

Career, insurance as a, 42. 

Census of Boston, 16; of Charles- 
ton, 16. 

Chambers of insurance, 100, 145. 

Chance, contracts depending on, 
103; element of, 341. 

Charitable insurance corpora- 
tions, 172. 

Chartered Companies, early, 
record of, 195. 

Charters, early, insurance, 185, 
186; of limited duration, 
189. 

Children, diseases of, 14; life in- 
surance of, in Germany, 259. 

Classics, foremost, insurance, 109. 

Climate and Health, 23, 24. 

Coal mining, accidents in, 23. 

Code of insurance, first, 99. 

Colonial, admiralty charters, 
reference to insurance in, 
149-150 ; insurance law, 203 ; 
laws of insurance, 157, 165; 
legislation on insurance not 
required, 165 ; policies, Amer- 
ican, 169; policies, phrase- 
ology of, 98. 

Commentaries on American in- 
surance law, 203. 



354 



Commerce, defined, 108; devel- 
oped by insurance, 34; in- 
surance as an element of, 
34, 50. Si. 53, 54, 182; 
relation of insurance to, 84, 
109, 122, 123, 193, 198, 
204; insurance in early, 91; 
enlarged by insurance, 101; 
insurance as a branch of, 
104; insurance in actual, 
124, 131; insurance a bene- 
fit to, 168, 183; accommo- 
dated by insurance, 187; 
insurance as a branch of 
German, 230; and naviga- 
tion, 108; clause of the cons- 
titution, reference to, 178. 

Commercial development and 
insurance, 91. 

Commercial jurisprudence, in- 
surance in, 153. 

Commercial power conserved by 
insurance, 86. 

Commercial risk, disregard of, 54. 

Commercial security, enhanced 
by insurance, no, in, 
121. 

Commercial value of insurance, 

H5- 
Common knowledge on insurance, 

value of, 208. 
Common law of insurance, 153, 

164, 165, 202. 
Companies' Acts, reference to 

insurance in, 328. 
Company, use of term, 174, 177. 
Complaints, methods of dealing 

with, in Germany, 249, 

257- 
Compulsory insurance, 71; early 

suggestions for, 146. 
Conflict of law, 202, 213. 
Congress of Arts and Science, 5. 



Congress, power of, over insur- 
ance, 191; attitude of, on 
insurance, 209. 

Congressional action on Federal 
supervision, history of, 209. 

Congressional Record, discus- 
sion of insurance taxation 
in, 275. 

Connecticut, insurance supervi- 
sion in, 199. 

Constitutional aspects of insur- 
ance, 192, 207, 211. 

Constitutional Convention, in- 
surance at the time of the, 
179. 

Constitutional law of insurance 
in Germany, 231. 

Continental Congress, consider- 
ation of insurance by, 176. 

Contingencies, provision for, 6. 

Contraband goods, insurance and, 
120, 154. 

Contract of insurance, 140, 
141; importance of, 204; 
German code of the, 231. 

Contract Law of Insurance, 29. 

Contractual basis of insurance, 93 

Contributionship, principles of, 
91, 92. 

Co-operation, need of, 310. 

Corporation, first American in- 
surance, 180; franchises de- 
fined, 302; income tax, true 
object of, 290. 

Corporations, insurance, 26; in- 
surance by, 84; advan- 
tages of insurance, 150, 
160, 183, 186; history and 
tendency of, 200 ; future of 
221; necessity of, 201. 

Cost of Imperial supervision, 240 ; 
relation of insurance to, 
65. 



355 



Council of Revision, considera- 
tion of insurance by, 192. 

Court decisions, German, on in- 
surance, 261. 

Court of Insurance, 29, 100, 151. 

Credit and Insurance, 8, 51, 57, 
68, 104. 

Credit insurance, 51. 

Currency problems, 37. 

Dangerous trades, insurance pro- 
tection for, 63. 

Decisions, American insurance, 
202. 

Delusions, follies and, 20. 

Departmental powers over insur- 
ance management, in Ger- 
many, 247, 248. 

Departmental rulings, in Ger- 
many, not subject to appeal, 

239- 
Deposits required by English law, 

3 2 7- 
Dictionary of insurance, first, 

US- 
Diplomatic CORRESPONDENCE of 
the Revolution, 128. 

Discrimination against local com- 
panies, 198. 

Diseases of miners, 23. 

Distribution, insurance as a fac- 
tor in, 50, 85; of wealth by 
insurance, 62. 

Disutility of no insurance, 85. 

Dividend plan of German life in- 
surance companies, 259. 

Dividends in life insurance, legis- 
lation concerning, 197; paid 
by German stock companies, 
243; relation of taxation to, 
278. 

Documents, preservation of, 96; 
value of commercial, 96. 



Double taxation, 277. 

Drawbacks and duties, 117. 

Dryden bills for Federal super- 
vision, 209. 

Dutch origin of marine insurance 
practice, 147. 

Duty of insurance, 8. 

Dwarfs and giants, 343. 

Earliest English policy in Ita- 
lian, 150. 

Earliest policy in English, 150. 

Early English law on insurance, 
152. 

Early insurance offices of Mas- 
sachusetts, 175. 

Early practice of insurance, 146. 

Early reference to insurance in 
England, 151. 

Early status and extent of 
insurance in America, 209. 

Economic function of insurance, 
76. 

Economic gain, resulting from in- 
surance, 88. 

Economic theory of insurance, 
68. 

Economics defined, 69. 

Economics, insurance, 5, 22, 31, 
50. 

Economy, duty of government to 
practice, 292. 

Education in insurance, 42, 115, 
124, 288, 306. 

Electricity, 25. 

Enemy, insurance on trade with 
the, 119. 

English Insurance Legislation, 

i53. 3 26 - 

English and American insurance 
law, 166, 184. 

English law adopted by Amer- 
ican courts, 167, 168. 



356 



Episcopal Church, Life Tables 
of, 16. 

Episcopal insurance corporation, 
171, 172, 173. 

Equitable Society of London, 11. 

Ethics of insurance, 7. 

European and Albert, 326. 

Evening Post, New York, 273, 
281. 

Examination of insurance com- 
panies in Germany, 262. 

Experience, value of, 334. 

Extra premium charges, 17. 

Factory system, effect of, 24. 

Family protection by insurance, 
61, 62. 

Farm loans, 37, 255. 

Fecundity, ii. 

Federal Corporation Tax, 289; 
should be repealed, 307. 

Federal supervision of insur- 
ance, advantages and need 
of, 28, 179, 205, 210, 211; 
history of movement for, 
208. 

Federal taxation of life insur- 
ance, 275. 

Fire insurance in England, early, 
53; function of, explained, 
81; companies, early, 154; 
taxation, 154; not com- 
merce, 207; in Germany, 260. 

First Act of Congress on insur- 
ance, 190. 

First American insurance cor- 
poration, 180, 209. 

First annual report of Massa- 
chusetts department, 199. 

First examination requirements, 
188. 

First fire insurance institution 
in America, 169. 



First fire protection company, 
170. 

First Governor's message on 
insurance, 192. 

First Hamburg policy, 147. 

First insurance department, 
199. 

First insurance legislation in 
the United States, 181. 

First insurance supervision in 
America, 173. 

First law on fire insurance in 
Massachusetts, 197. 

First life insurance institution 
in America, 171. 

First Massachusetts insurance 
charter, 175, 186. 

First movement for Federal regu- 
lation, 206. 

First public insurance office in 
America, 158. 

First publicity requirements, 188. 

Florence, Code of Insurance of, 
98. 

Florentine statute on insurance, 
145. 

Forecasts, accurate, 336, 337. 

Foreign commerce, advanced by 
insurance, in. 

Foreign insurance companies, 
opposition to, 182; discrimi- 
nation against, in; status 
of, in Germany, 245; reserve 
investments of, in Germany, 
257; requirements of, in 
Germany, 246. 

Franchise taxes, insurance, 302. 

Fraud in insurance, 106, 108. 

French and American insurance 
law, interdependence of, 
205. 

French Spoliation Claims, 118, 
119, 126, 127, 130. 



357 



Friendly Society of Charleston, 
308. 



170. 
Funds and their uses 



Gain and loss exhibit required in 
Germany, 249. 

Gambling, 7, 8; disutility of, 345; 
futility of, 344. 

Gambling and insurance con- 
trasted, 7, 72, 73, 78, 83. 

Gambling Act, 152, 331 ; extended 
to America, 166-168. 

General average defined, 97. 

General property tax, insurance 
and the, 272. 

Genoa, Statute of, 162. 

Geographical pathology, 21. 

Geology, 22, 23. 

German insurance code, 229, 265. 

Germany, life insurance super- 
vision in, 228; taxation in, 
288. 

Gibbons vs. Ogden, 293. 

Girard Life and Trust, 15. 

Goddard vs. Garrett, 164. 

Gold Standard, 38. 

Gordon, first American author on 
insurance, 176. 

Goss vs. Withers, 117. 

Gotha Insurance Company, 258. 

Government, German, attitude 
towards insurance compa- 
nies, 233; control of insur- 
ance, beginnings of, 147; 
control, increase in, 201; 
fire insurance, 59; insurance, 
first suggestion for, in Amer- 
ica, 159; regulation of insur- 
ance in Germany, effective, 



Hamburg marine insurance com- 
panies, 187. 



Hand-in-Hand, 155. 

Happiness promoted by insur- 
ance, 61, 63. 

Hay, average price of, 339. 

Horses, average price of, 339. 

Heredity, ii. 

History of insurance, ^$. 

Hooper vs. California, 207. 

House Committee on Judiciary, 
report of, 209. 

Illicit trade, insurance and, 204. 

Imperial supervising department, 
German, 234. 

Imperial supervision, scope and 
purpose of, German, 234. 

Incidence of life insurance 
taxes, 295. 

Income protection, by insur- 
ance, 82. 

Income tax exemption, life insur- 
ance premiums and, 271. 

Income tax reductions, 296. 

Incorporeal property, defined, 
70. 

Indemnity, insurance as a contract 
of, 168. 

Indiana, insurance supervision in, 
199. 

Individual vs. corporate under- 
writing, 144. 

Individual underwriting, inse- 
curity of, 183. 

Inductive method, value of the, 
348. 

Industrial assurance companies, 
English legislation on, 330. 

Industrial insurance, Parlia- 
mentary discussion of, 330; 
progress of, 14; in England, 
33; in the World, 19. 

Industrial system, place of^in- 
surance in the, 51, 84. 



358 



Industrial technology, 24, 25. 
Insanity, increase in, 12. 
Insolvency, procedure in case of, 

3 2 9- 
. Insurable interest, 152, 161, 
163-4, 33 1 - 

Insurance, an element of com- 
merce, 208; and saving, 78; 
definition of, 6, 75, 78, 108, 
124; economic function of, 
70 ; first mention of, in 
American literature, 103; 
in admiralty law, 149; in 
American colonies, 169; in- 
dispensable to society, 46; 
not gambling, 7, 8, 52. 

Insurance and assurance, legal 
distinction in, 327. 

Insurance Company vs. Dunham, 
148, 149. 

Insurance Company of North 
America, 84, 103, 104, 125- 
127, 181, 184. 

Insurance Company of the State 
of Pennsylvania, 127, 184. 

Insurance Critic, 280. 

Insurance expense inbusiness, 66. 

Insurance failures, early, 55. 

Insurance Law, 25. 

Insurance law, early Massachu- 
setts, 196. 

Insurance policies not articles of 
commerce, 205. 

Insurance supervision in Eu- 
rope, importance of, 265. 

Insurance taxation, early ob- 
jections to, 304. 

Interest earnings, relation of 
taxes to, 279. 

Interest rate, a form of insur- 
ance, 56, 57, 59, 76. 

Interest rates, effect of decline 
in, 274. 



Inter-marriage, ii. 

International, business of in- 
surance is, 206. 

International law, insurance in, 
28, 103, 128; insurance as a 
problem in, 246. 

Interstate chaos, result of over- 
legislation, 200. 

Interstate commerce, insurance 
an element of, 210. 

Interstate insurance business, 
180, 210; German super- 
vision of, 229. 

Interstate trade in insurance, 
no restraint upon, 184. 

Investigations of insurance in 
England, early, 206. 

Investment requirements in 
Germany, 247. 

Investments of German insur- 
ance companies, 254, 255. 

Jettison, practice of, 146. 
Judicial interpretation of poli- 
cies, 166. 

Kentucky, taxation of insurance 
in, 276. 

Large companies, value of, 35. 

Law a progressive science, 214. 

Law, ancient and modern, in- 
terdependence of, 203. 

Law, insurance, 30, 83; and legis- 
lation, 140; American, 121 ; 
growth of, 191; early, 106; 
early works on, 203 ; first 
treatise on, 121; modern, 

JI 3- 
Law of the individual life, 339. 
Law 'of large numbers, 344. 
Law Merchant, insurance and 

the, 83, 93, 99, 211. 



359 



Laws, natural, 339. 

Legal science, insurance as a 
branch of 25, 203. 

Legislation, insurance, 27; Ger- 
man method of, 231, 265. 

Leipziger Life Insurance Com- 
pany, 258. 

Lex Mercatoria Americana, 150, 
151, 190. 

Libraries, insurance, 43. 

Licenses and fees, cost of, 276. 

Life insurance, a semi-public 
function, 305 ; ancient meth- 
od of, 92 ; beginnings of, in 
America, 181; definition, 
270; discouraged by taxa- 
tion, 272; earliest pamphlet 
on, 176; nature of, 284; not 
for profit, 286; not com- 
merce, 207 ; of children, code 
governing, 260; of children, 
probibited in France, 162; 
should not be taxed, 270; 
value of, 61, 270. 

Life insurance companies, not 
money-making institutions, 
284. 

Litigation in insurance, 30, 31. 

Lloyd's, practice of, 56, 158, 163, 
178; Coffee House, 114, 125; 
deposits required by mem- 
bers of, 329. 

Lombard Street, reference to, 
165, 166. 

London Assurance, 156, 160. 

London Coffee House, 114, 125. 

Longitude and latitude, 17. 

Loss prevention and insurance, 

65. 
Lotteries, 52. 
Lottery tickets, insurance of, 

192. 
Luck, good and ill, 341. 



Manufacturers' mutual insur- 
ance companies, 73. 

Marine insurance, early, in Eng- 
land, 53; development of, 
96; not commerce, 207; Ger- 
man supervision of, 230. 

Maritime interest, 143. 

Marriage, relation of insurance to, 
39. 4o, 63. 

Massachusetts, insurance super- 
vision in, 27, 199; liberal 
insurance laws of, 194. 

Massachusetts Congregational 
Insurance Society, 175. 

Massachusetts Fire and Marine 
Ins. Co., 185, 186, 189, 195; 
charter limitations of, 188. 

Massachusetts Hospital Life 
Ins. Co., 15, 194. 

Mathematics of insurance, 9, 10. 

Medical directors, position of, 
11. 

Medical examination, insurance 
without, 260. 

Medical topography, 15. 

Medicine, insurance, 11, 12. 

Memorial to New York Legis- 
lature on insurance, 194. 

Merchants' Coffee House, 125. 

Meteorology, 23. 

Mining, 22, 25. 

Miners Phthisis, 23. 

Misrepresentation, 31. 

Missouri, insurance supervision 
in, 199. 

Model tables used by German 
life insurance companies, 
258. 

Modern law, relation of early to, 
202. 

Monitor, Insurance, 274. 

Monopoly, insurance and, 55, 157. 

Mortality, problems of, 346. 



360 



Mortality rates, variations in, 
346, 347- 

Mortality statistics of the Mu- 
tual Life, 13. 

Mortgage loans, on city real 
estate, 255; effective super- 
vision of, 255; rules govern- 
ing, in Germany, 251. 

Mutual Assurance Company op 
Philadelphia, 175. 

Mutual insurance in Germany, 
241. 

Mutual Life Insurance Com- 
pany, 13, 15. 

Mutual Reserve, reference to, 
326. 

Mutualism, insurance a form of, 74. 

Nantucket Insurance Company, 

i95- 

National Bureau of Insurance, 
first proposed, 206. 

National commerce, supported 
by insurance, 106. 

National Insurance Office, pro- 
posal for, 156. 

National scope of insurance, 
181, 184, 185, 187, 197. 

Naval and commercial juris- 
prudence, 122. 

Naval interest, 95. 

Navigation, insurance as a factor 
in, 108, 204. 

Necessity of insurance, 85. 

Negative economic quantities, 
70. 

Netherlands, insurance in the, 
148. 

Neurology, science of, 12. 

New England Sun Fire Office, 
169, 170. 

New Hampshire, insurance super- 
vision in, 199. 



New Jersey, taxation of insur- 
ance in, 276. 

New York, insurance supervi- 
sion in, 199. 

New York Life and Trust Com- 
pany, 15. 

New York Life vs. Craven, 207. 

New Lloyd's institution, 177. 

Newark, city tax suit, 273. 

Newburyport Fire and Marine, 
196. 

Non-interference, Englicy pol- 
icy of, 331. 

Non-Participating business, ex- 
tent of, in Germany, 245. 

Non-Participating business in 
Massachusetts, 245. 

Numbers, theory of, 333. 

Objections, early, to insurance 
taxation, 304. 

Ohio Life and Trust Company, 
i5- 

Oleron, Laws of, 92. 

Opinion of Alexander Hamil- 
ton on insurance regula- 
tion, 211. 

Opinion of James Wilson on in- 
surance regulation, 211. 

Ordinance of Barcelona, 145, 
149, 162. 

Ordinance of Florence, 149, 150. 

Ordinance of France, on insur- 
ance, 92, 123. 

Ordinance of Hamburg, 119. 

Ordinance of Philip II, 147. 

Ordinance of Venice, 149. 

Ordinances, early, of insurance, 
98, 144. 

Ordinances of Genoa, 162. 

Ordinances of Portugal, 145, 
146. 

Ordinances of the Marine, 162. 



361 



Ordinary Insurance by Indus- 
trial companies, 36. 

Organization of German Insur- 
ance Department, 237. 

Origin of Insurance, ancient, 
142. 

Over-legislation, evils of, 200. 

Over-taxation, evidence of, 294, 
3°9- 

Panics and Depressions, 38. 

Papal decree against bottomry 
bonds, 143. 

Participating and Non-Partici- 
pating business permitted 
in Germany, 245. 

Paul vs. Virginia, 205, 207. 

Pauper Burials, 41. 

Pauperism, prevented by insur- 
ance, 41. 

Pediatrics, science of, 14. 

Penalties and fines for violation 
tion of insurance code, 247. 

Penalties of non-compliance 
with English law, 329. 

Penn, William, on insurance, 158. 

Pennsylvania, early insurance in, 
125. 

Pennsylvania, first legisla- 
tion on insurance in, 181. 

Pennsylvania Insurance Com- 
pany for the Insurance of 
Lives, 15, 194. 

Pennsylvania Legislature, in- 
surance petition to, 125. 

Perpetual annuities, 69. 

Perth Amboy, insurance begin- 
nings in, 172. 

Petition for insurance com- 
pany rejected by Massa- 
chusetts, 175. 

Petition, insurance, to Pennsyl- 
vania Legislature, 182. 



Philadelphia Board of Health, 
Life Table of, 16. 

Philadelphia Contributionship, 
171. 

Phoenix, of London, 185. 

Phoenix Insurance Company of 
Nantucket, 196. 

Piracy, 117. 

Policy of insurance, nature of, 
29. 

Policies, early American, 165. 

Policyholders, unjustly taxed, 
305; interest in taxation, 
310; protection of in Ger- 
many, 235. 

Polly, the case of the Schooner, 
128. 

Poor, insurance for the, 33, 41, 
42, 58. 

Predictions, accurate and erro- 
neous, 338; approximately 
accurate, 347. 

Preliminary term, permissible in 
Germany, 236, 252. 

Premium income of German insur- 
ance companies, 254. 

Premiums, taxes on, 273. 

Presbyterian Ministers' Fund, 
44, i? 1 - 

Prevention and insurance com- 
pared, 65, 75. 

Price, relation of insurance to, 58, 
67, 76. 

Pringle vs. Hartley, 119. 

Pritchard vs. Insurance Com- 
pany, 168. 

Private or contract law of in- 
surance, German, 231. 

Privateers, The Liverpool, 118, 
119. 

Privy Council, acts of, reference 
to insurance in, 151. 

Probability, use of term, 334. 



Problems of life insurance in 

Germany, 258. 
Profit in insurance, 53, 56, 57. 
Prohibition of bottomry loans, 

143- 

Prohibition of life insurance, 
early, 163. 

Prohibitory laws, early, 162. 

Prohibitory legislation in Eng- 
land, 164. 

Projects, insurance, 155. 

Property, theory of, 346. 

Property protection by insur- 
ance, 85. 

Protection, insurance as a factor 
in, 50, 57, 75, 76, 85, 86, 
88; cost of, and insurance, 
67. 

Prudential library, 43. 

Psychology of insurance, 18, 
19, 20. 

Public advantages of insurance, 
123. 

Public interest in insurance, 
German, 232, 233. 

Public policy, insurance and, 31, 
167. 

Public welfare, life insurance 
and, 309. 

Publications, German, govern- 
ment, on insurance science, 
250. 

Publicity, duty of, in Germany, 
263. 

Publicity requirements, early, 
i94, i95- 

Railway bonds as investments, 37. 
Railway developments, 36. 
Rates of insurance during the 

Revolution, 128. 
Rates of marine insurance, 

"5- 



Regulation of insurance, begin- 
ning of, in England, 100; 
early demand for, 105; Ger- 
man, 235. 

Regulation of insurance con- 
tract, 155. 

Re-insurance, German supervi- 
sion of, 230. 

Religious aspects of insurance, 
43, 44, 45- 

Religious objections to insur- 
ance, 7, 8. 

Report of House Committee on 
Judiciary upon the constitu- 
tional aspects of insurance 
regulation, 179. 

Reports of insurance compa- 
nies, 328. 

Reserve, definition of, 250. 

Reserve requirements in Ger- 
many, 247. 

Reserve fund investments, 

rules governing, 251; of 
foreign companies, 257. 

Reserve funds, separate account- 
ing of, in Germany, 252; 
supervision of, in Germany, 
256. 

Respondentia bonds, 92, 124, 143. 

Retaliatory legislation, dan- 
gers of, 193. 

Returns, early requirements of, 
196; objectionable, 198. 

Revolution, insurance practice 
during the, 128. 

Rhodian Sea Law, 91, 92, 95, 97. 

Richards vs. Marine Insurance 
Company, 120. 

Risk, theory of, 6; estimate of, 55, 
87; compensation required 
for, 76; reduction of, by in- 
surance, 80; transference of, 
87. 



363 



Risk assumption, specialization of, 

74- 
Risk avoidance, 8i. 
Royal Exchange Assurance, 

156, 160. 
Royal message on insurance, 111. 
Rules and customs of Boston, 

173- 
Russo-Japanese War, 120. 

Saddlers Company vs, Badcock, 
112, 164. 

Salem Marine Insurance Com- 
pany, 196. 

Salvation Army, insurance by, 
44- 

San Francisco earthquake, re- 
lation of, to insurance, 260; 
losses paid by German com- 
panies, 260. 

Sanitary Science, 15. 

Saving habits, fostered by insur- 
ance, 32. 

Science, insurance as a, 45, 106; 
function of, 334. 

Sciences, classification of, 5, 

45- 

Scientific methods, value of, 77. 

Security, importance of, 79. 

Select Committee of Friendly 
Societies, 6. 

Select Committee on Assurance 
Companies, 140. 

Selection of risks, 18. 

Self-insurance, 53, 65, 66; fal- 
lacies of, 77. 

Shareholders profits in German 
insurance companies, 244. 

Smelting and refining, 25. 

Smuggling, 117, 154. 

Social device, insurance a, 87. 

Social economics, insurance in, 
61. 



Social gain resulting from insur- 
ance, 6. 

Social progress, how achieved, 
72. 

Social reform, 40. 

Social science, 39. 

Social value of insurance, 7, 
285. 

Soil surveys, value of, 22. 

Southern death rates, 17, 18. 

Spectator, 326. 

Speculation, economic aspects of, 
72; futility of, 344; and in- 
surance contrasted, 7. 

Stamp Act, first on insurance by 
Congress, 190; insurance re- 
ferred to in the, 174. 

Stamp duties on insurance, 154. 

Stamp taxes, 275. 

State interference, dangers of, 
193; evils of, 216. 

State legislation, gradual in- 
crease in, 194. 

State supervision, of insurance, 
27, 28; inception of, 186; 
beginnings of, 188; develop- 
ment of, 195; modern sys- 
tem of, 199; conflict of, 212; 
cost of, 276. 

Statistical returns, early, 195, 
198. 

Statutory law of insurance, 165. 

Statutory requirements, Massa- 
chusetts, early, 196; present, 
200. 

Steam boiler insurance, 65. 

Stock companies, legal status of, 
in Germany, 242. 

Stock control, limitations of, 186. 

Stockholders, protection of, in 
Germany, 235, 242. 

Stockholders' profits not limited 
in Germany, 244. 



364 



- ■»■'"■• - -■ 



Suggestion, psychology of, 20. 

Suicides, 13, 20, 30; forecast of, 
348. 

Sun, New York, 303. 

Sun Fire, 155. 

Sunday School societies, insur- 
ance by, 44. 

Supervision of insurance, 26; 
government, 140; reasons 
for, 141, 145; by the Church 
of England, 172, 173; effec- 
tive in Germany, 237; an 
independent judicial branch 
of the German government, 
238; extent of, in Germany, 

253- 

Supreme Court decisions on 
insurance, 180, 205, 206, 
210. 

Supreme Court of Pennsylva- 
nia, early insurance case, 
166. 

Suretyship and warranty, 83. 

Surgery, science of, 13. 

Surplus, taxation of, 274. 

Switzerland, life insurance super- 
vision in, 228. 

Systematic savings habits, 78. 

Talmud, reference to insurance in, 
142. 

Tax, burden on the aged, 299; 
reduction necessary, 300 ; 
burdens upon losses, 303; 
increase in, suggested, 308, 
reduction, plea for, 309. 

Tax exemption, results of, 271. 

Tax problem re-stated, 307. 

Tax problems, constitutional as- 
pects of, 293. 

Tax rate, comparative, 310; Ger- 
man and American, 297. 

Tax reform, need of, 287. 



Taxation, burden of, 277; dis- 
criminatory, 194; theory of, 
269; of necessities, 294; 
State and Federal, 293; in- 
equalities of, 294. 

Taxation, of insurance, first, 154; 
in America and Germany 
compared, 265; taxation of 
insurance, 268; amount paid 
by life insurance companies, 
269; economic justification 
of, 271; practice of life in- 
surance, 272; on premiums, 
2 73 ; early discussion of, 2 74 ; 
on surplus, 274; diversities 
of State, 276; increase in, 
277; double, 277; relation 
of to cost of insurance, 278; 
comparative increase in busi- 
ness and taxes, 279; burden 
on policyholders of , 279; in- 
cidence of, 280 ; discussion of, 
280; argument against in 
Congress, 281 ;paid by policy- 
holders, 282; need of public 
consideration of, 282; a tax 
upon a tax, 282 ; unjust, 283 ; 
relation of to cost of insur- 
ance, 284; increase of, 285; 
insurance, opposed, 285 ; rate 
of, 285; of reserves, menace 
of, 287; by Federal govern- 
ment, 289; should be for 
revenue, 291; moral aspects 
of, 291; ethics of, 303; sta- 
tistics of, 294; European 
methods of, 297; sphere of, 
301; without representa- 
tion, 301; public interest 
in, 301; rational system of, 
304; unjust discrimination 
in, 305; uniform laws on, 
3°9- 



365 



Taxes, paid by German compa- 
nies, 295; paid by policy- 
holders, 295; comparative, 
German and American, 295; 
in Canada, 296; in Australia, 
296; gross inequality of, 
298, 299; insurance, in Italy, 
298; on property, 272. 

Technical skill, employment of, 
in German insurance super- 
vision, 238. 

Tendencies, modern, in insurance, 

35- 

Texas, insurance commissioner of, 
308. 

Theory of risk and insurance, 
31, 86. 

Theory of State Supervision, 
origin of, 215. 

Thermometry, 10. 

Thrift, compulsory, 71; taxation 
of, 269, 270. 

Trade, discourse on, 105; insur- 
ance as a branch of, 158, 
159; insurance for encour- 
agement of, 164; of insur- 
ance, the, 52, 54, 55, 98, 99. 

Transportation, science of, 36. 

Treasury report, reference to 
taxation in, 278. 

Uganda, medical survey of, 22. 

Uncertainty, effect of, 6. 

Uncertainty, and property, 75. 

Underwriters, individual, 125. 

Underwriting, early practice of, 
56; individual, 84; early 
Colonial, 125. 

Uniform legislation, need of, 
202, 213. 

Uniformity of insurance prac- 
tice, early need of, 98, 
99. 



Union Fire Insurance Company, 

i55- 
Universal tontine, 180. 
Usage of merchants, legal effect 

of, 166. 
Usury laws and insurance, 94, 95. 
Utility of insurance, 73, 74, 79, 

84, 115, 204. 

Valuation, German method of, 
250. 

Value of insurance, 6, 32, 34, 
55, 85, 86, no, 126. 

Variation, law of, 342. 

Venice, Ordinance of, 98. 

Vermont, insurance supervision in, 
199. 

Visitorial powers, early, 197. 

Vital statistics, 17. 

Voluntary insurance, advan- 
tages of, 71. 

Wagering contracts, 105, 163, 
167, 168. 

War, insurance in, 119, 120; in its 
relation to insurance, 128, 
129, 130, 131 ; effect of, upon 
premium rates, 178; taxes 
on life insurance, 275, 281, 
294. 

Warranty, effect of, 31. 

Wealth, distribution of, 36. 

Weekly Underwriter, 308. 

Westminster Fire Insurance 
Company, 155. 

Weston vs. the City of Charles- 
ton, 294. 

Widow schemes, 39. 

Wigglesworth Life Table, 175. 

Williams vs. Craig, 166. 

Wisby, Laws of, 92. 

Women as insurance risks, 13. 

Women, medical examination of, 14. 



366 







MAY IS 1911 



